Why is China loading up on gold bullion
Duncan Richardson, News Editor
5 May 2016, 9:50 a.m.
There’s no doubt china is building one of history’s largest ever stockpiles of gold. Last week China launched the much anticipated Shanghai gold fix in attempt to wrestle the gold pricing mechanism away from western banks. China is also the world’s largest producer and consumer of the yellow metal. These actions should leave us in no doubt China wants to control the gold market. The Chinese government has also spent years encouraging their population to buy physical bullion.
Officially the Chinese government has 1,658 tonnes of gold, however, experts who analyse global gold flows believe this figure could be between 3,000 and 20,000 tonnes. If true why is China being so secretive? The gold bugs believe China is preparing to back their currency by gold and replace the U.S. dollar as the world’s reserve currency.
The U.S government abandoned the dollars link with gold in 1971 and ever since all the worlds currencies are effectively fiat. Fiat currency is legal tender and backed by confidence alone. Governments favour fiat currency as they can print as much as they like to appease their voters. The downside is they generally print too much, generate inflation and debase the value of their currency.
Bloomberg estimate if China have 10,000 tonnes of gold and they wanted to back the Yuan fully with gold the price would have to rise to $64,000 per ounce. The gold price is not going to $64,000 per ounce anytime soon, however, the rise of the Chinese seems unstoppable and their appetite for gold remains insatiable.