Thursday, January 28, 2016

Why China Needs So Much Yellow Metal

According to Song Xin, President of the China Gold Association (CGA), sufficiently high gold reserves are needed to buttress the yuan.

At a September seminar on gold in Beijing, Song told delegates:

“If the (yuan) renminbi wants to achieve international status, it must have popular acceptance and a stable value. To this end… it is very important to have enough gold as the foundation and raising the ‘gold content’ of the renminbi. Therefore, to China, the meaning and mission of gold is to support the renminbi to become an internationally accepted currency and make China an economic powerhouse… That’s why, in order for gold to fulfill its destined mission, we must raise our gold holdings a great deal, and do so with a solid plan. Step one should take us to the 4,000 (metric) tons mark, more than Germany and become number two in the world, next, we should increase step by step towards 8,500 (metric) tons, more than the U.S.”

Song’s predecessor, Sun Zhaoxue, recommended China increase official reserves and encouraged citizens to accrue gold. Some estimates peg private Chinese gold ownership at 12,000 metric tons.

Still, I don’t know that China necessarily wants to back its currency with gold, even if only at a token level. It makes more sense to buttress the yuan and enhance its stability than to move China to some kind of gold standard.

That’s because it would negate the massive advantages of operating a fiat currency system, not the least of which includes unrestricted money-printing to spend as the administration wishes.

But the motivation to build large gold reserves still runs deep. China just needs the right opportunity, and, with the way things are going, the United States just might deliver that…

Consider that there will be another financial crisis, it’s only a question of when. Former Treasury Secretary Tim Geithner warned of this himself, as I’ve discussed here previously.

If the United States is once again the epicenter of the next financial implosion (and, with things as they are, there’s not much reason to believe otherwise), it will be that much easier for other superpowers, like China and Russia, to swing the world reserve currency system into their orbit.

In this kind of scenario, the outsized role (and prestige) of the U.S. dollar would likely diminish just as quickly as China’s yuan, padded by immense gold reserves, would soar.