A CHINESE GOLD STANDARD?

March 17, 2011

A Chinese Gold Standard?

By Alix Steel

The Street
March 17, 2011

…China consumed 175.2 tons of gold in the fourth-quarter of 2010, bringing its grand total for the year to 579.5 tons, or 18.5 million ounces, according to the World Gold Council.

That's a lot of gold. The U.S., in comparison, consumed 233.3 tons in 2010.

It's unknown how much of that gold was consumed by citizens or its central bank, but the question still remains -- What will China do with all that gold?...

The idea is staggering and not to mention fraught with difficulties. China's central bank currently holds 1,054 tons of gold, about 1.8% of its total reserves.

China holds $2.85 trillion in foreign reserves, which means the country would need to buy roughly 66,000 tons of gold to fully back its currency. Even if the country upped the ante to just 3%, the country would need to buy 1,000 tons.

Technically, a full gold standard isn't an option. Under the IMF's first amendment to Article IV of Agreement, ratified in 1978, participating countries are not allowed to peg their currency to gold.

But that doesn't mean that China won't try to legitimize its currency by ramping up its gold holdings. The U.S., which sports the current world reserve currency, holds more than 8,000 tons of gold…

China has also been telling its citizens to buy gold, promoting different gold funds, giving investors access to overseas products and launching a global gold contract based in yuan by Chinese Gold & Silver Exchange…

"Private citizens have bought more gold in the last 30 months than the People's Bank of China owns altogether," says Adrian Ash, head of research for BullionVault.com.

China has also been trying to beef up the yuan to make it a more viable global currency…

China is also a country that plans long term. Once the largest holder of U.S. debt, China has stopped loaning money as aggressively. According to the U.S. Treasury department's Website, in November 2010, the country lent the U.S. $895.6 billion, which was down 3.6% from the same period a year earlier.

"China has shortened all their maturities to less than 5 years and now they are not as strong in the auctions," argues Chuck Butler, president of EverBank, who believes China wants the yuan as the world's reserve currency. Speculation is bubbling that the country is shying away from the dollar to make more room for another asset…

Yan Xiaomei, deputy director at the People's Bank of China, says "if China holds more gold and silver, it would make RMB more confident in people."

Xiaomei believes that China would buy more gold and silver at the "proper time, but not as a critical policy, the quantity would also be not too big."…

If China does increase the size of its gold reserves with the express purpose of backing the yuan, the result would be explosive for gold prices.

Butler says that the consensus is "$4,000 to $5,000 gold within the decade."…

GFMS executive chairman Philip Klapwijk was unable to comment on how much gold China bought in 2010 or will buy in 2011 due to the sensitivity of the information but did say that even if China just raised its reserves 1,000 tons to 2,000 tons with yearly purchases of 200 tons, the result would still be good for gold prices.

"Not only because of its impact on the global supply/demand balance but also due to its positive effect on investor sentiment and, to some extent, the negative signal it would send about the U.S. dollar."…

Read full article here.

†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

You should review Goldine's Account Agreement along with our risk disclosure booklet, Coin Facts for Investors and Collectors to Consider ®, prior to making your purchase. Goldline has a spread or price difference between our selling price, called the "ask", and our buy-back price, called the "bid". That spread varies depending on coin or bar you acquire. Spreads on 1 oz bullion coins, 90% silver dimes and quarters, and one ounce and larger bullion bars are 13%. All other coins have a spread of 28%. There is also a 1% liquidation fee when you sell your coins back to Goldline. The market must go up enough to overcome this spread before an actual profit is achieved. Precious metals and rare coins can increase or decrease in value. Past performance does not guarantee future results. Coins are a long-term, three- to five-year, preferably five- to ten-year investment. We believe precious metals are suitable for 5% to 20% of the average investment portfolio though others may recommend a different percentage.

To receive free information package on gold and precious metals investing, call Goldline at 1-877-376-2643.

Get Your FREE Investor Kit!
Learn how to acquire Gold and Silver
Complete the form below to receive your FREE kit:
Title:
First Name:
Last Name:
Phone:
Zip:
Please check this box to sign this form and confirm that Goldline may send its free investor kit to you and contact you using the phone number above.
Address:
 
City:
Country:
State:
Zip:
Please check this box to sign this form and confirm that Goldline may contact you using the email address above and send its free investor kit to you for free.
Your Investor Kit will include
  • An Introduction to Precious Metals
  • Advantages of Owning Gold and Silver
  • Popular Coins and Gold Products
  • How to Acquire Precious Metals and Rare Coins