公孫軒轅 The Return of the Empire

The Yellow Emperor, 公孫軒轅China does not have a historical beginning. The earliest known text and verbal traditions explain the presence of the Yellow Emperor, 公孫軒轅, who is observed reconstructing the empire 4,700 years ago from devolution spawned out of an earlier time of unity. The Yellow Emperor, a farmer, reportedly accomplished various natural feats such as taming brown and black bears, tigers, the ferocious 貙 (there is no similar animal in the west), and the mythical 貔貅. The 貔貅, pictured below and similar to a winged lion, was described as having a ravenous appetite for gold and silver. Through legend we learn that taming this animal implies that rather than consuming gold and silver that the 貔貅 would bring these precious metals willingly to its master – all the while keeping evil at bay. The Pan Asian Gold Exchange (PAGE) is the modern day 貔貅.

The 貔貅, similar to a winged lion, was described as having a ravenous appetite for gold and silver.

For over six* years I have eagerly awaited definitive signs of regionalization to emerge from the areas of the world that are doing fine while other areas wallow in recession and deleveraging. From economic history, it is known that this regionalization must happen. The sun does arise again – no matter how bad the storm, or how dark the night, a new day will eventually dawn. Regionalization hastens this process. When pundits attempt to use the terms regionalization and decoupling interchangeably, they simply do not understand. They are thinking in clean steady linear terms. We have referenced and defined this idea of regionalization in previous articles; regionalization is a policy of institutionalized severance, not one of orderly, much less polite, decoupling.

I learned very specific bits and pieces about this process while traveling throughout China, particularly in Yunnan and Hong Kong ten months ago. In the article Reading Tea Leaves, I shared my conclusion that the tool to engage the process of regionalization will likely be related to commodities. Further to the point Li Daokui, a top level advisor to China’s central bank, made the following pronouncements while at the World Economic Forum this past week.

“The incremental parts of our foreign reserve holdings should be invested in physical assets,”

“We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way.”

“Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries,”**

With comments like these it appears that China is ready to switch from owning the USA’s debt to owning just about anything that is based in substance. According to Mr. Daokui, there is nearly $10,000,000,000,000 ready to be put to work – nearly five times what they currently own in USA Treasury securities. Of course, there are currently laws against ‘too much’ foreign ownership. However, in times of crisis laws are often changed.

So what is the tool from which to engage the process? Recent rhetoric, such as that referenced above, in connection with real implementation of related decrees found in China’s ‘12th five-year’ economic plan leads me to believe that it is the PAGE.

With its anticipated launch in the fourth quarter of this year, the PAGE is going to change the way the world accesses gold, silver and the Yuan.

According to expert testimony provided during regulatory hearings held by the Commodity Futures Trading Commission in March 2010 the gold market has just one ounce of gold available for every 100 ounces of paper gold that is traded. This means that if someone was to go into that market they would, on average, procure 1/100th of gold and 99/100ths of counter party risk per purchase. Given current concerns about financial ‘contagion’ this is a highly dangerous risk to accept. The PAGE is going to provide 100/100ths of contacts in gold, not to mention silver, deliverable to various vaults around the globe. To understand the significant of this, one might ask the following: Is it preferable to have 1/100th of something that also carries substantial default risk or 100/100ths of the same thing considering that the price is the same? I, for one, would go for the 100/100ths option. The world is just about to have the opportunity to make its own choice now that the PAGE is nearing its launch.

The process that the PAGE has gone through to get to this juncture has neither been mysterious nor gone unmentioned. As referenced above, the Chinese 12th five year economic plan lays out the creation and the institutionalization of PAGE. Further, lending credibility to the process, high ranking members of the Chinese currency governing entity SAFE (State Administration of Foreign Exchange) are also on the board of the PAGE. SAFE has been an effective gatekeeper to the much sought after access to Yuan. Thus it appears that the long road to a convertible Yuan is nearing an end – as long as a person or entity is willing to bring gold, or for that matter silver, to the PAGE. If this becomes operational fact, then the Chinese will have made their currency convertible – in terms of Gold – and probably cemented the region as the new center of global finance.

Moreover, a freely traded Yuan will likely radically appreciate in value as currencies that are backed by gold (the Chinese Government owns 90% of the PAGE – and thus will essentially be exchanging their Yuan for gold and silver) often do. This higher valued Yuan would make it far less expensive to purchase companies or goods as referenced above by Mr. Daokui.

As this process plays out a new reliance on the Yuan will free the region from importing stagflation and other ills related to being pegged to the USA dollar. This in turn will lead to increasing prosperity for those in the PAGE sphere of influence – from the Association of Southeast Asian Nations to the Shanghai Cooperation Council (click to learn more via a previous article). Due to a new found stability, already apparent due to China’s recent displacing of the USA’s 110 year position as the number one country in factory production, these two entities and the regions that they interlace with are likely to present brilliant investment opportunities for decades. This process should serve to soberly remind everyone that a strong currency is a vote of confidence by the global investing community. The confidence will drive capital to the region which, if history is a guide, will be redeployed into manufacturing infrastructure. Gone would be the days where the region, particularly China, recycled its prosperity into purchasing western debt which then perversely kept them beholden to the economic tribulations of the USA and Europe.

So the Pan Asian Gold Exchange should be looked at not only as a way to gain access to 100/100ths gold or silver, but for the Yuan to become convertible.

Behold and prepare to receive! The 貔貅 approaches and with it the empire returns once more.

* In 2005, China began a little noticed program wherein it issued government debt denominated in Yuan. This move signaled China’s initial effort to making the Yuan convertible. This was not mere nuance, yet went largely ignored by so called mainstream economists.

** I believe that any additional Federal Reserve easing, especially related to the longer maturing bonds, will likely be used by China to exit more of their holdings in this maturity range. This is based on evidence that the Chinese were large sellers of shorter term USA Treasury notes and bills when the Federal Reserve became large buyers of these types of securities during QE2.