On 31 December last year the US attempted to curtail Iranian nuclear ambitions by imposing sanctions which penalize any country that buys oil from Iran, or does business with its central bank.
These sanctions were approved by EU foreign ministers on 23 January, and shortly afterwards the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, announced that it would discontinue services to Iranian banks.
A threat to China
The sanctions against Iran are not just a problem for Tehran however, they also pose a serious threat to China which is Iran’s largest trading partner and buys more petroleum from Iran than any other country. Iran is China’s No. 3 supplier of crude and its oil imports from Iran rose 30% in 2011 to around 557,000 barrels a day.
As a result the Chinese government is strongly opposed to the sanctions believing “the imposition of embargoes against Tehran will not resolve the existing problems”.
China is simply unwilling to forego such a large amount of its vital energy supply and has therefore vowed to bypass the SWIFT system and instead settle its bills with Iran using gold.
This is a highly significant development because it re-monetizes gold and reinforces its role as the currency of last resort.
Gold is money
I have argued for many years that gold is money and that as such investors should hold a portion of their wealth in the yellow metal as an alternative to paper currencies such as the British Pound or US Dollar.
The problem is that gold is still seen by most people as just another commodity like copper, oil or zinc. But whereas these other commodities are consumed over time, the vast majority of gold is not. In fact, almost all the gold ever mined still exists in the form of bars, coins, jewelry or religious artifacts.
Gold is traded on the currency desks of the banks and brokerage houses, not the commodities desks and it’s traded against paper currencies. The fact is, gold has been money for around 3,000 years and this latest development should help many more investors realize that gold is still money today.