by Jim Clark
April 24, 2015
Can 1.4 billion Chinese be wrong? Between 2008 and 2009 China doubled their reserve of gold bullion stock. In April of 2009, the Chinese Central Bank (The People’s Bank of China) reported gold holdings of 1,054 metric tonnes. Recently, Bloomberg Intelligence estimated China’s gold holdings at 3,510 metric tonnes, second only the United Sates’ reserves of 8,134 metric tonnes.
China has tripled their gold reserves in only six years! China is both the largest producer of gold in the world and is also the largest buyer of gold from the world’s exchanges. Why is China’s appetite for gold so voracious?
When China launched the Shanghai International Gold Exchange on September 19, 2014, Zhou Xiaochuan, the governor of the Peoples’ Bank of China (PBOC), stated, “[The] gold market,” he said, “is an important and integral part of China’s financial market. We are now the largest gold producer, as well as the biggest gold importer and consumer in the world. . . The People’s Bank of China will continue to support the sustainable growth and sound development of China’s gold market.”
The speculation among most metals analysts for the reason behind China’s massive purchases of gold is that the Peoples Bank is maneuvering to support the value of the Yuan as a both a world reserve currency and an IMF (International Monetary Fund) reserve currency, backed by its gold holdings.
The IMF has created an artificial international currency to dispense money known as SDR (Special Drawing Rights) SDRs include the dollar, euro, yen, and British pound. China wants to be included in this exclusive club. The IMF has said they will decide on this issue in either their May or October meeting.
The strategic importance of gold was acknowledged by the Chinese government:
“ The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB. -[Wikileaks]
At this point, you may fairly ask the question, “What does this have to do with my money?”
Let’s take it by the numbers:
- China has nearly $4 Trillion in total foreign exchange reserves. This is the largest currency reserve of any country. Compare this to US foreign exchange holdings of $133 Billion.
- The total value of the world’s gold reserves is estimated at $1.25 Trillion (with gold at $1,220/troy Oz).
- China holds $1.28 Trillion in US Treasury Bonds.
- The US holds $320 Billion in gold reserves.
- These reserves give China tremendous power in the international monetary markets. How powerful is this?
- With $4 Trillion in foreign currency reserves, this means that China could purchase the entire US gold holdings with only 8% of its foreign exchange reserves. [Read this again.]
- China could purchase the entire gold reserves of the world with only 32% of its foreign currency holdings. If China paid twice the current price for gold, they would still have $1.5 Trillion in reserves.
- With China accumulating gold to strengthen and support the Yuan (RMB) as an international reserve currency, what will happen to the value and purchasing power of your dollars if China decides to flood the world market with their US Treasuries?
China is buying gold, not for a profitable trade, but in preparation for a new world monetary order that holds serious consequences for our way of life here in the USA. The Chinese view gold in its proper historical perspective, not as a vehicle for making money, but as a store of value.
Now to address my original question, “What does this have to do with my money?”
Compare the value of a dollar, not backed by gold to the value of the yuan backed by gold. To defend the dollar and the value of US Treasury bonds against a major liquidation of US dollars by China, the US would need the value of the US gold reserves to match China’s holdings of $1.28 Trillion in US Treasuries. Gold will need to be priced at $4900 per troy oz. This is 4x the current price of gold.
What will your dollars be worth in a world with a gold Yuan?