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a u g u s t / s e p t e m b e r 2 0 1 6 www.resourceworld.com 25 S omething obviously has lit a fire under both the price of gold as well as valu- ations on associated share investments since the beginning of the year through mid-July 2016. During that time, gold has soared by more than $300 per ounce to near US $1,370/oz while important min- ing share indexes have risen by as much as 200%! While there may indeed be several factors which could account for these per- formances, many observers are beginning to hold the belief that it is the gold market actions of two vitally important countries, China and Russia, which could be of par- ticular significance. The primary facts are simple to state. According to a May 2016 study authored by Russia's Pravda news agency, "…cen- tral banks of Russia and China have been buying a lot of gold lately. During the past fifteen months, China has increased its gold reserves by 70% to 1,700 tonnes, ranking sixth in the world in gold reserves. Russia's gold reserves have grown by 21% to 1,460 tonnes…In the summer of 2015 the coun- try [China] doubled its appetite for the precious metal…Russia started buying gold in 2015, increasing purchases against the backdrop of falling oil prices." One might ask why China and Russia, two countries with Marxist-Communist backgrounds, would now be turning to gold. The answer could lie in the fact that both nations have moved toward much more pragmatic economic policies in recent decades and, from that point of view, there may indeed be serious con- cerns which could justify accumulating growing reserves of gold. As Nobel-winning economist, Milton Friedman, pointed out in his best-sell- ing text, Free to Choose, there has been a pronounced trend toward massive govern- ment over the past half-century, away from prior free market philosophies toward Fabian socialism and New Deal liberalism in Britain and the US. He informs us that rapidly growing deficits and debt have developed due to the resultant expan- sion of government programs, thereby creating increasing levels of deficits and debt. He goes on to explain that at first, governments attempted to finance these deficiencies via inflation, but that became politically unpalatable. During recent years, I would note that central banks have taken to direct pur- chase of government debt via fiat money creation in the US, Britain, the European Union and Japan. Former Federal Reserve Chairman, Alan Greenspan, recently entered the discussion during a lengthy interview with the Bloomberg News Service, tak- ing the position that the ongoing growth of debt was unsupportable. In fact, the US Congressional Budget Office just issued a study which stated that, "…If current laws generally remain unchanged, the deficit would grow over the next ten years, and by 2026 it would be considerably larger [in relation to the size of the economy] than its average over the past 50 years." Greenspan openly declared that such debt growth was unsupportable over time and, per- haps surprisingly, he stated strongly that the true remedy rested in the restoration of a pure gold standard such as existed up until 1913 in America. It would seem that Russia and China are amenable to such arguments. In Russia, the government has become so concerned about adding to its gold reserve that it is not only buying up all of Russia's domestic gold production, but is also importing gold from outside sources. In the Pravda article noted above, that publication tells us that, "…Clearly Russia puts great strategic importance on its gold reserves. Both President Putin and Prime Minister Medvedev have been photo- graphed on numerous occasions holding gold bars and coins as a display of eco- nomic stability and strength…" China has been equally aggressive, or perhaps even more so, in terms of add- ing to its gold holdings. A recent article in the respected Forbes Magazine noted that, "China's central bank…continues to purchase the precious metal on a monthly basis." Forbes also tells us that China's gold reserves are now approaching 60,000,000 ounces and this growth in China's gold hold- ings is taking place at the same time China is reducing its foreign currency reserves. Two other items of recent interest also would appear to point toward continued growth in Chinese gold activity. In one case, they just announced that for the first time ever, they would begin to officially quote the relative price of their Chinese Yuan in terms of its value in gold. In the second case, China's biggest bank just bought a controlling stake in Britain's ICBC Standard Bank PLC whose property hold- ings include one of Europe's largest vaults. If China is to bring its gold reserves up to the level of countries such as the US, Germany, and France, that would suggest sizeable gold purchases for some time to come. If that proves true, it would appear to suggest further precious metals strength ahead. Another question that comes to mind is: Are China and Russia taking steps to establish a gold standard by which the value of their currencies will be defined in terms of gold? n This material is taken from sources believed to be reliable and is provided for information only. Any investment decision should be made only after prior consultation with investment professionals. Leonard Melman is a financial and political writer who focuses on issues relat- ing to the resource sector. Mr. Melman lives in Nanoose Bay, British Columbia, Canada and can be reached at lmelman@shaw.ca s p e c u l a t i o n s L e o n a r d M e l m a n Are China and Russia heading toward a gold standard?