Chinese Demand for Gold
China is the world’s second largest economy, and has taken steps to cement its place among the economic elite of the world. One of those steps has been the acquiring of gold. The country appears to have an insatiable appetite for the yellow metal, and has been building its gold reserves in recent years.
China has not published its actual gold holdings since 2009. At that time, the country reported that it held 1054 tons of gold. The country reportedly doubled its reserves during the 2008/2009 buying cycle. Recent estimates have ranged considerably, with some analysts believing the country holds over 3000 tons of gold, while other analysts believe that number may now exceed 8000 tons.
Whatever the case may be, it appears that China has been buying gold and doing so quietly. The question then becomes: Why is China buying so much gold and why are they not making it public?
For starters, gold has long been considered a way to project power. Desire for gold jewelry has also always been a consistent source of demand.
There does, however, appear to be something much larger at work here. Something that could potentially change the global financial system as we know it today…
China has likely been positioning itself, and its currency, the yuan, for a more prominent role in global finance and trade. In fact, the yuan is about to join other key global currencies, such as the dollar, yen and euro, as a member of the IMF’s Special Drawing Rights. Becoming a recognized global reserve currency could significantly bolster the yuan’s status, and in the process ensure that China is a key figure at the global bargaining table. The introduction of the yuan as a global reserve currency could potentially draw capital out of dollars and into the Chinese currency. As money flows out of dollars and into yuan, the dollar could potentially see a significant decline.
Although the dollar has been strengthening in recent months on the notion of higher rates and as other countries continue with quantitative easing programs, the introduction of a viable alternative reserve currency could have a significant and lasting effect on the U.S. currency. It’s no secret that a move away from the dollar is already under way. Several nations, such as China, Russia, even France, have already set up swap lines that facilitate transactions outside of dollars. Several global companies have also begun such moves.
There has been talk by many nations for some time to move away from the dollar, and it looks like that idea is finally gaining some real traction.
As China directly or indirectly challenges the U.S. dollar as the global reserve currency of choice, the more gold the country has in its possession, the more credibility its currency will have. China may even be going a step further – as the world’s largest consumer of gold and the world’s largest producer of gold, China may be seeing a way to control global currency markets through gold.
China has recently announced that it is seeking to establish a yuan-based gold fix. Such a gold fix can potentially have enormous implications on global markets.
The Shanghai Gold Exchange, or SGE, would operate much like the exchanges of the West, with one key difference, however. Unlike London, for example, the SGE will be sponsored by banks with direct Chinese Government support. Unlike the private banking structure that is used in London, the banks sponsoring the SGE are largely state-owned and are used as tools for central planning. While the SGE may appear to be operating a “free market” structure, the influence of the Chinese Government will likely play a major role in the gold price. What this means is that the Chinese Government will be able to increase or decrease the yuan-based gold price at their discretion. This further means that the dollar-yuan relationship would also have to change, since gold would be denominated in both currencies.
The power of the Chinese Government to influence global currencies and exchange rates would represent a significant shift in the balance of power from West to East. China is pushing its agenda, and gold plays a key role in that agenda. The nation will likely continue to buy and hoard gold as it looks to gain further power and global economic influence.
This ongoing saga is a clear demonstration of the power of gold. Gold ownership brings credibility and power to the global financial stage. Nations realize and understand the inherent value of gold, and therefore look to acquire and hold it…