According to the latest market numbers, China continues its relentless trend to hoard gold. As seen on the chart below, this trend is going on since the start of the financial crisis. The chart shows the withdrawals from the Shanghai gold exchange, which is considered the most important proxy for Chinese gold demand.

China On Its Way To Change The Monetary Landscape

There is a lot of speculation on what China exactly wants to achieve with all the gold it acquires. One of the theories is that they are preparing a gold standard. Now that idea got some exposure this week, even in the mainstream media. You read that correctly, mainstream … Bloomberg explained what would happen if China would return to a gold standard, something that is not considered unlikely given the amounts the country has assembled. In official terms, China lines up as the 6th country in terms of gold reserves. The issue is that its gold reserves could be much higher than officially communicated, making it maybe the country with the highest reserves.

According to Bloomberg Intelligence, a move to a gold standard in China would require an exchange rate of as much as $64,000 an ounce, 50 times bullion’s. A traditional gold standard, in which the precious metal backs the currency, is basically impossible at current prices due to the amount of metal needed.

Chinese policy makers are trying to establish the yuan as a reserve currency, and backing it with gold would help attract foreign capital inflows.

It would probably have to be very different than an old gold standard, said Kenneth Hoffman, Princeton-based head of global metals and mining research at Bloomberg Intelligence. They have all this currency out there, they want it all soaked up by central banks.”

Meantime, Chinese policy makers are trying to get more influence in the global monetary scene by becoming part of the IMF’s currency basket (i.e., the Special Drawing Right, known as SDR). The SDR basket includes the dollar, euro, yen and British pound. If China succeeds to become part of the SDR, a potential move to back their currency with gold would mean that they would be more in control of the global monetary system.

Most central banks do not like to see gold in the monetary system as it “limits” their monetary expansion strategy. The prime example is the second largest gold consumer in the world, India, trying to “leverage” their gold holdings. According to another article on Bloomberg, India is changing its policy to allow citizens to deposit gold with banks to earn interest. That way, the Indian government tries to “tap the idle bullion” which lies with households.

Individuals and institutions can deposit a minimum of 30 grams in the form of bullion or jewelry. That type of “gold monetization scheme” is characterizing the debt inspired policies of spending.
China, clearly, looks at things differently. And we are convinced that, longer term, he who owns the gold will have the power in this monetary system. The system is clearly changing under the hood. We recommend private gold owners to hold onto their physical metal. Sooner or later, it will prove to be a good hedge against more structural changes in the monetary system.