How Geopolitics Could Make Singapore the Most Important Gold Market

Posted by Gregor Gregersen on 23 Apr 2017


Last year I had the privilege to attend a dinner with Mr. Chan Chun Sing, a Singapore Minister from the Prime Minister's Office.

I brought along a copy of Jim Rickards’s book “Currency Wars” to the dinner. In the book, Jim described his participation in the U.S Military’s first financial war games which were held to study various scenarios that could upset the dominance of the U.S dollar in the global financial system.

During the wargames, Russia led a bloc of countries to create a new currency based on a fixed gold ratio which was stored outside of Russian control in neutral Switzerland. Other countries could also obtain this currency by depositing gold in neutral and trusted Switzerland .

Once this currency was established, Russia would stop accepting U.S dollars in payment for their commodity exports, requiring payment in the new currency instead. This would force third party countries to buy gold and sell dollars to get the Russian energy imports they depended on.

If OPEC and China would have joined this system, it would have effectively undermined the dominance of the U.S dollar and inevitably brought about the creation of a new modern gold standard causing gold to appreciate immensely in importance and price.

However, such an “Anchor Currency” would need to be stored in a trusted neutral jurisdiction and be easily audited by all parties to minimize the possibility of “cheating”; be it illicit gold removal, fake gold, or issuing of new currency without the required gold being actually present.

While the wargames created interesting scenarios, the establishment of such an anchor currency does not necessarily have to result from financial wars. As the world is accumulating more debt and becoming more leveraged, the next major financial crisis will result in increased calls for a new type of reserve currency that is less prone to be inflated unilaterally by individual countries.

Regardless of what this new currency might be, there will be a need for trusted neutral jurisdictions to act as escrows and keep it all honest. With power shifting increasingly to Asia, I am quite certain that it would not be Europe’s Switzerland with its French, German, Italian cultures but Asia’s globally oriented Singapore, with its Western, Chinese, Indian and Malay cultures which will play an increasingly important roles in such a scenarios.

Singapore is widely recognized as the Switzerland of Asia for its rule of law, independence and strong asset protection. While Singapore’s culture is heavily westernized, the Chinese can culturally relate much better to Singapore than Switzerland. Mandarin Chinese, for example, is one of the four official languages in the country with English being the common language.

Singapore has also been the model for much of China’s economic development since the eighties when the then Chinese leader Deng Xiaoping modelled the Special Economic Zones such as Guangzhou after Singapore.

In light of all of this, I thought that “Currency Wars” would be a good read for a Singapore Minister and I was pleasantly surprised when Minister Chan Chun Sing told me that he had already read it. It made me wonder how many of such books might have influenced Singapore’s 2012 strategic push to become a major bullion trading hub.

Singapore stadium to downtown area

Bustling Singapore at night, aerial view of the new Sports Hub towards the Central Business District;

 

How Singapore’s success formula is ideal for Gold Storage

What sets Singapore apart is the government’s ability to make pragmatic long term policies that result in very efficient institutions and letting the people enjoy the fruits of their labour to a much higher degree than other countries. I have experienced the difference first-hand, having lived in the United States (11 years), Italy (11 years), Germany (8 years) and Singapore (10 years till date).

Singapore’s success and consistent policies have created in residents an implicit trust towards the Government. Lee Kuan Yew, Singapore’s longest serving Prime Minister, summed it up by saying: “If I have to choose one word to explain why Singapore succeeded, it is ‘confidence’ ”. When China needs international investors, they often seek Singapore as a partner knowing that investors are much more likely to invest in a project that Singapore is involved in.

Confidence is both the product and enabler of Singapore’s success. Singaporean politicians are always conveying to the nation the need to improve itself to maintain this stamp of quality. It is a big reason why thousands of global corporations have their Asia headquarters and R&D operations in Singapore. It is also why a train breakdown in Singapore must be fixed in record time (because it tarnishes the Singapore brand).

Singaporean politicians are pragmatic, capable planners that have to compete foremost on merit to advance. Minister Chan, for example, worked himself up from an Army recruit to becoming a three-star Army general . He went on to study in Singapore’s top schools before graduating with First Class Honours from the Cambridge University in the United Kingdom and later completed the Sloan Fellows Programme from the Massachusetts Institute of Technology (MIT).

The Singapore spirit is to take adversity and make it a strength and profit centre. In 1965, Singapore lacked a strong military and enough clean water for its population. Today, Singapore’s armed forces can muster over a million soldiers when active reserves are called while its arms industry is manufacturing and selling amphibious combat vehicles to the U.S marines and artillery to India. It has also become a worldwide leader in water processing and even exports water to Malaysia.

The government is extremely well endowed having 152,935 USD in net reserve per capita, which is the highest in the world and continues to be the only Asian country with an AAA rating by all major ratings agencies. The Singapore sovereign wealth funds are some of the largest in the world and Singapore is the single largest foreign investor in China.

In 2016, The Wall Street Journal ranked Singapore as the 2nd freest economy in the world. The island state continues to be ranked highly by The World Bank as one of the easiest places to do business. Singapore is also ranked the 7th least corrupt country by Transparency International. Despite its size, Singapore is the 3rd largest financial centre in the world and is one of the top exporters of refined petroleum. A major tourism destination, three tourists visit Singapore yearly for every local resident.

Gigabit internet connections are becoming the standard for households and its medical and education systems are world class (Singapore ranks #1 in Math and Science scores ranked by OECD and boasts the 2nd most efficient healthcare system as ranked by Bloomberg). People also live on average 4 years longer than in the United States (according to the World Health Organization).

Members of parliament meet citizens at weekly “meet the people” sessions to address issues ranging from trivial complaints, feedback on unneeded bureaucracy and maintaining the “we must do better” spirit. I have never seen a more responsive government to its citizens’ complaints. It explains Singapore’s remarkable cohesion, openness and extremely low crime rate.

How all this relates to Gold Storage…

Students of history know that gold nationalizations have happened before. For example:

  • The Unites Stated nationalized all Gold under its Jurisdiction in 1933 (Executive Order 6102 for gold and EO 6814 for Silver in 1934)
  • Great Britain banned gold between 1966 and 1979 to stem the decline of the pound’s value
  • Australia still has a gold seizure law allowing for “seizure of gold if expedient to do so, for the protection of the currency or of the public credit of the Commonwealth” (Reserve Banking Act of 1959).

When the next major currency crisis occurs, there might be political pressure from highly indebted countries to repatriate gold and impose capital controls. If these countries were to nationalize gold, what should happen to gold held by citizens of these countries in Singapore?

Singapore, following its own rule of law, will likely state that private property is protected and that foreign jurisdictional authority to seize gold does not reach into Singapore. This response would be in line with protecting Singapore‘s most treasured assets: The Rule of Law and Confidence of investors.

Betraying this confidence could mean an economic disaster for Singapore . This is why Singapore is such a good location to store physical gold and silver as an insurance against tomorrow’s crises and black swan events.

Note that while Singapore would be a great jurisdiction for gold during such crises, in practice, vault operators and intermediary dealers would also have to choose whose rules to follow and might resort to force majeure clauses in their storage contracts in such situations.

From Singapore

Gregor Gregersen