The global financial mess, despite headlines, is still very much with us. Quantitative Easing (QE) has bought the West time, but the long-term effects of this deliberate devaluation of the currencies of America and Europe will ripple across the world; already the mere tapering of QE has caused emerging market jitters.

Britain’s mirage

For example, despite talk of economic recovery in the UK, the government is still getting deeper into debt; only the rate at which it gets deeper has slowed. There is a clear housing bubble emerging again, with mortgages and cheap credit being used to give a quick bump to the economy; while eased planning restrictions will see the destruction of thousands more acres of land across the UK to build homes no one can afford, unless they take out more mortgage debt.
Meanwhile, fracking has been given the green light across the UK: whilst side-stepping the debate about its environmental and health consequences, the rapid sell-off of this new-found national resource looks distinctly like another attempt to kick-start a faltering economy for short-term gains without looking into the long-term; squandering this oil and gas as we did the North Sea oil and gas.

One benefit the UK has enjoyed has been that of holding a major global reserve currency and hosting the financial heart of the globe in London. Yet the money printing has undermined the pound, and with the UK’s poor gold reserves (310.3 tonnes, after Labour’s Gordon Brown sold off 60% of the UK’s reserves at a rock-bottom price), Britain stands in a poor position should the going get tough.

Backing up Eastern money

And a look at global gold movements indicates that preparations for a new global financial architecture are well underway. India has acquired 557.7 tonnes of gold, as at April 2013. Russia, in September 2010, held 726 tonnes. By April 2013, Moscow had acquired another 250.9 tonnes, to hold 976.9 tonnes.

However, although officially stable on 1,054.1 tonnes, China is believed to be the biggest mover. Analysts suspect that the People’s Bank of China has covertly acquired around 3000 tonnes in reality, and is pushing for more.

Hard going soft

The picture that emerges is one of the reserve ‘hard’ currencies of the West scrabbling to hold onto what they have, while the booming East sucks up any available gold. The presence of real gold and other precious metals in the central banks of China, Russia and India, along with the natural resources and oil and gas reserves these countries have, will add credibility to their currencies and undermine the foundations of the ‘hard’ currencies of the West; foundations that have allowed QE to take place.

As such, the foundations are being laid for a challenge to the Dollar / Euro / Pound reserve currencies of the world by the new economic powers from the East. Already, the West is engaged in giving the impression of economic growth to support the dollar, Euro and Pound, and devalue gold. Meanwhile, the East is quietly ignoring the Western PR, and taking concerted action to lay the foundations to assert their own currencies as global reserve currencies.

Driving integration

It will be interesting to see how European countries respond. Together, Italy, France, Germany and the ECB hold reserves amounting to 8,780.6 tonnes, more than the US holds. Undermining the position of the Euro could lead to internal fighting and division, breaking the single currency apart; but far more likely (despite maybe some peripheral losses), it will lead to greater transfers of gold from central banks to the ECB, and a stronger Euro.

Germany, with the world’s second largest reserves, has already started repatriating its gold from the US and London. It also has gold stored in the Banque de France. In 1999, Germany transferred 7.46 million ounces of gold to the ECB, as did other EU member states, to help support the bank and single currency. As the economic heart of the EU, German reserves have been called upon more than those of other states, and have gently declined: 11.2 tonnes was the fall between September 2010 and April 2013.

The coming global changes will cause yet more economic uncertainty. Yet they will likely act as a boon to those advocating greater integration, leading to the pooling of more gold and the strengthening of the Euro and ECB at the expense of member states.

Difficult times for Britain

Because of Labour’s gold sell-off, the UK is going to be left highly vulnerable. The government needs to find ways of acquiring gold to back the currency, while ensuring London remains the global financial centre to minimise the damage. The alternatives are stark: rule from Brussels, and the end of democracy, or taking serious the need for the UK to build as strong relationships as possible with Russia, China, Brazil and India, in order to guarantee that as the West goes down, the UK can at least hold onto the balloon string of the rising East.