Thursday, August 2, 2007


Two years ago, I was strolling along cobblestone roads of Lijiang, a little city in China that is poised at the southernmost end of the Himalayas. The millennia-old city lies in the shadow of the towering Jade Dragon Snow Mountain – a three-mile high peak. The Jinsha River, which courses through Lijiang, supplied the city's many quaint eateries, with fresh-caught perch. Many of the local menus also feature yak-meat and beer locally brewed from the Jade Dragon's glacial waters.

The cobblestones of Lijiang form part of the ancient Silk Road. But it dawned on me that day, while ambling through the old city, that "Silk Road" is a misnomer; that its proper name should be the "Silver Road." For if you view this famous trade route from an Asian perspective, Silver Road is exactly what it was.

Let's envision this mysterious part of the world as Marco Polo would have found it, in 1280 AD, at the age of 20, when he arrived in China with his father and uncle, both Venetian traders on their second trip to the Middle Kingdom.

We think of silk and tea when we think of the China of that era, but the Polos also encountered a magical cleaning cloth that could be itself cleaned by throwing it on the fire for a bit; asbestos. And that was not all. China had an iron manufacturing industry whose output would not be equaled by Europe for another five centuries; an Imperial Post Office, with second-class, first-class and Royal Priority Mail services; a complex, canal-based transportation system; and a prodigious salt-manufacturing industry. (Salt, before the invention of refrigeration, was a commodity almost as precious as gold.)

Over the Silk Road, the Chinese shipped goods and technologies like: silk, gunpowder, spaghetti, ceramics and tea. Technologies that the Europeans – still largely feudal, agrarian and caught up in internecine warfare – had neither the will nor the skill to produce. But mercantile China was not giving this stuff away! The accepted means of payment was, of course, gold or silver…particularly silver.

China's love-affair with silver as money predates recorded history. Silver was informally monetized by 475 BC, and was officially declared the currency of the land by the Yuan Dynasty, which commenced in 1279. Silver remained China's official money until well into the 1930s, when the Middle Kingdom became the last great civilization to cave into the seductions of fiat money.

An interesting footnote to this time in trading history was that China valued silver more highly than did Europe's central banks: 10 ounces of silver could be exchanged for one ounce of gold in China, whereas in Europe, the going rate was 16:1.

Over the ensuing centuries, commerce between East and West was so intense that by the year 1800, China wound up with half of the world's silver! Europe, in its effort to sustain trade with China, had colonized the New World to mine and coin yet more silver and gold. But even with Europe's new-found silver and gold in the New World, they could not keep up with their payments.

This situation was the source of considerable pain to European pride and solvency. So the British decided to get into the dope-peddling business. The famed tea trade between Britain and China, and China and the Americas, those great Clipper ships, weren't built just to haul tea. No, they were introducing sweet, addictive, stupefying opium from India and Pakistan to the population of China in order to get their silver back. It had devastating results. Hence China was unable to enforce its ban against opium trafficking.

Its money and its youth threatened, an infuriated China outlawed opium in the early 1800s. But mercantile China, used to thriving on peaceful trade and innovation, rather than war and conquest, was at a total loss to confront the Royal Navy, which sailed and later steamed to Chinese ports escorting boatloads of British merchantmen larded with the dreaded drug.

By the 1830's, writes historian Richard Hooker: "(T)he English had become the major drug-trafficking criminal organization in the world; very few drug cartels of the twentieth century can even touch the England of the early nineteenth century in sheer size of criminality. Growing opium in India, the East India Company shipped tons of opium into Canton [now Guangzhau] which it traded for Chinese manufactured goods and for tea. This trade had produced, quite literally, a country filled with drug addicts, as opium parlors proliferated all throughout China in the early part of the nineteenth century. This trafficking, it should be stressed, was a criminal activity after 1836, but the British traders generously bribed Canton officials in order to keep the opium traffic flowing. The effects on Chinese society were devastating. In fact, there are few periods in Chinese history that approach the early nineteenth century in terms of pure human misery and tragdy. In an effort to stem the tragedy, the imperial government made opium illegal in 1836 and began to aggressively close down the opium dens."

To enforce its prohibition (and its sovereignty) China sent a rag-tag fleet of junks out to intercept a British opium shipment in Canton in November 1839. An indignant Queen Victoria dispatched the Royal Navy to exact revenge. For two years the Royal Navy mercilessly hammered China's shore batteries, ultimately prevailing.

Humiliated by this defeat, China signed the Treaty of Nanking in 1842, followed a year later by the British Supplementary Treaty of the Bogue. These provided that the ports of Guangzhou, Jinmen, Fuzhou, Ningbo, and Shanghai should be open to British opium trade and British residence; in addition Hong Kong was ceded to the British. Sensing blood, France, Russia and the United States all piled in with similar treaties granting similar access. In essence, the West subdivided the Middle Kingdom.

It took China nearly 100 years to shake itself from the stupor of the opium trade, during which period China endured the hideous predations of the Japanese during the 1930s and 1940s, and later the savagery of the cultural revolutions of Mao Zedong, both of which served virtually to wipe out China's cultural and intellectual best.

Yet here we are, a mere 31 years after Mao's death, confronted with a new China, vigorous and increasingly
prosperous – teaching the West once again, as it has for two millennia – how to play the trade game. And once again, we Westerners are not learning very well. Anthony Fell, formerly vice-chairman of the Royal Bank of Canada, had this to say about the West's, and particularly the United States', trade imbalances with our Pacific neighbor:

"The U.S. annual trade deficit, now running at a rate of more than three-quarters of a trillion annually, or 6.3 percent of GDP, is a huge concern. It's not prudent for the U.S. to depend on foreign bond buyers to finance domestic consumption. Asian countries produce low-cost goods which are shipped to the United States, the U.S. ships dollars back to Asia, and then the Asians purchase U.S. treasuries.

"One could say this is a giant international Ponzi scheme. I don't think this model is viable or sustainable. Asian central banks will not want to accumulate U.S. dollars at the current rate forever. There is no free lunch. Virtuous circles like this, where everyone appears a winner, always come to an unhappy ending."

But an unhappy ending for the U.S. dollar could produce a very happy ending for silver.

A comment one often hears from people returning from their first visit to China is, "Better teach your grandchildren how to speak Chinese." I submit that there is an alternative to having to learn all the multiple dialects of Chinese…And that is to learn to speak Silver, the ancient and modern money of China.

If you are in possession of real money, Silver, then that is all the Chinese you will ever need to learn.

[Joel's Note: One man that has been capitalizing on the global bull market in resources better than most is Kevin Kerr, editor of the Resource Trader Alert. Last year Kevin delivered an average gain of 96% on all closed trades for his happy readers. The key to trading these commodities, obviously, is knowing precisely when to get in and when to get out. Following is a link to an email Kevin sent his readers last year when he advised them to cash in for a 400% gain on silver calls he had previously issued. If you're thinking about getting in on the global resource boom, you'll want to check this out:

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