If China Backs Its Currency with Gold, It Could Have Profound Effects for Investors … and Consumers
Larry Edelson – - writes today:
I know for a fact that Beijing wants its yuan to eventually become a gold-backed currency,
much like the Swiss franc was originally. Backing the yuan with some
gold will certainly help it become a major international currency.
Edelson [11]
is a financial adviser who travels frequently to Asia, a former
high-volume gold trader who is interviewed a lot in the mainstream
financial media.
I have no idea whether Edelson is right or not. But he’s not the first to make the claim.
Doug Casey says [12] that if one country – such as China – switches to a gold-backed currency, the dollar will be toast:
All it will take for the world to realize that U.S.
dollars are nothing more than hot potatoes is for one country (Doug
postulated that maybe China would be first) to introduce a gold-backed
currency. If China introduced a gold-backed yuan, for example, who on
earth would want anything to do with U.S. dollars?
Similarly, SafeHaven points out [13]:
Suppose a large exporter, such as China, which
undervalues its currency and runs a large trade surplus as a result,
takes a huge radical step and goes all the way to a 100%-reserve gold
currency. The ultimate hard currency. If this succeeds, China is the new
England – the financial capital of the world, forever. Everyone else’s
money? In a word: pesos. Hard currency is Chinese currency. China’s
natural supremacy over the barbarian kingdoms of the West is restored.
Goldcore argues [14]:
China is clearly trying to position the yuan or renminbi
as the alternative global reserve currency. The Chinese likely realise
that they will need to surpass the Federal Reserve’s official, but
unaudited, gold holding of 8,133.5 tonnes.
***
World Bank President Robert Zoellick recently mooted the possibility
of a return to some form of gold standard. It seems extremely likely
that senior and influential Chinese policy makers, bankers and
government officials may be having similar thoughts.
Simit Patel writes [15]:
China’s central bank continues to aggressively accumulate
gold. Is this a setup for making the renminbi a gold-backed currency?
Many have speculated that this is the game plan. Certainly a currency
that is gold-backed will have appeal as a reserve currency capable of
storing wealth; indeed, the reason why the US was able to position
itself as a reserve currency is largely because it was once pegged to
gold.
MaxKeiser says [16]:
China is clearly trying to position the yuan or renminbi
as the alternative global reserve currency. The Chineselikely realise
that they will need to surpass the Federal Reserve’s official, but
unaudited, gold holding of 8,133.5 tonnes. China is the sixth largest
holder of gold reserves in the world today and officially has reserves
of 1054.1 tonnes which is less than half those of even Euro debtor
nations France and Italy who are believed to have 2,435.4 and 2,451.8
tonnes respectively.
***
[This [13]]
game theory article is great because it points out that China does not
need to amass a gold stock similar to the US, it can simply go to a gold
standard now and effect a simultaneous devaluation against the dollar
(as game theory dictates that the US and all other CB’s would be forced
to follow China’s lead, or risk losing all their capital as investors
buy the only gold backed currency in the world).
And Wikileaks noted several reasons for China’s stocking up on gold. ZeroHedge summarizes [17]:
As the following leaked cable explains, gold is, to China
at least, nothing but the opportunity cost of destroying the dollar’s
reserve status. Putting that into dollar terms is, therefore,
impractical at best, and illogical at worst. We have a suspicion that
the following cable from the US embassy in China is about to go not
viral but very much global, and prompt all those mutual fund managers
who are on the golden sidelines to dip a toe in the 24 karat pool. The
only thing that matters from China’s perspective is that “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.” Now, what would happen if mutual and pension funds finally
comprehend they are massively underinvested in the one asset which
China is without a trace of doubt massively accumulating behind the
scenes is nothing short of a worldwide scramble, not so much for paper,
but every last ounce of physical gold…
From Wikileaks [18]:
3. CHINA’S GOLD RESERVES
“China increases its gold reserves in order to kill two birds with one stone”
“The China Radio International sponsored newspaper World News Journal
(Shijie Xinwenbao)(04/28): “According to China’s National Foreign
Exchanges Administration China ‘s gold reserves have recently increased.
Currently, the majority of its gold reserves have been located in the
U.S. and European countries. 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.”