China’s Demand for Gold and its Implications for Fiat Currency
While financial market turmoil has led a number of countries to stock up on gold, China stands out from the rest due to the sheer quantity of gold it has purchased over the last couple of years. In 2015 alone, it expanded its reserves by a whopping 70% and is currently one of the top five holders of gold in the world. Gold imports have decreased over the last few months due to stock market and currency problems; however, the acquisition of gold bar and coins are still on the rise.
The Shanghai Gold Fix
What is perhaps even more surprising than the fact that China is hoarding gold is the country’s recent decision to set a Yuan-denominated gold benchmark. London has, over the course of many years, actually determined global gold prices in dollars – something that China clearly feels is unfair considering the fact that it is in fact the world’s largest producer, importer and consumer of gold. The Yuan benchmark will be used by 18 trading members, but has the potential to be expanded in the future should the Yuan become fully convertible.
At the same time, there is an important difference between the new Shanghai Exchange and the London Gold Fix. While the London Gold Fix claims that it conducts billions of dollars in gold trade transactions every year, the transactions do not actually involve physical gold bullion. In fact, most people who “buy gold” via this trade system do not actually receive gold in hand. The Shanghai Exchange, on the other hand, does deal in physical bullion and buyers receive the tangible asset that they purchase, not just paper proof of ownership.
A New Chinese Gold Standard?
There is a very real possibility that the main reason China is frantically buying up gold is to create a gold standard for its currency. The governor of China’s Central Bank has noted that the world’s monetary system has inherent weaknesses and stated that any international reserve currency should have a stable benchmark. While a number of current and former Asian presidents and prime ministers have called for a return to the gold standard over the last 12 years, China’s size and economic influence adds a great deal of weight to the discussion.
Furthermore, China clearly wants to play a larger role in setting global economic policy. Its success in having the IMF add the Yuan to the IMF special drawing rights basket is an important step in that direction, but it’s not the only step the country is taking. If China can successfully accumulate up to 4,000 tons of gold, it would have about the same amount of gold as the United States and Russia own each. This quantity of gold would add more weight to China’s actions or lack of action and could impact the dollar’s overall value.
While it is common knowledge that China’s reserve bank has been secretly accumulating gold for a number of years, the country’s recent gold buying spree is worthy of note. While it is impossible to ascertain at this point all the reasons China is buying large quantities of gold and creating its own gold exchange, it is clear that the country’s course of action could significantly impact the world’s fiat currency system.
By Steve Hunt
Founding Member & Sr. Advisor
Scottsdale Bullion and Coin
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