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Thursday, February 17, 2011

Yuan – the new Gold Standard?

China is the biggest producer of gold on the planet. None of that gold moves outside of China. China is also buying gold in vast quantities. In fact their race to acquire gold from all quarters is accelerating at an alarming rate giving rise to speculations as to the reason.

According to the World Gold Council, 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. By comparison, the US consumed just 233.3 tons in 2010.

Talk about buy gold. China buys gold from anywhere and everywhere. The state-controlled China National Gold Corp, for example, bought half of Coeur d'Alene Mines (CDE) gold concentrates from its Kensington gold mine in Alaska.

China has been telling its citizens to buy gold, promoting the different gold funds. Even giving investors access to overseas products. A global gold contract based in yuan by Chinese Gold & Silver Exchange has been launched and the ICBC and World Gold Council recently teamed up to create the 'Only Gold Gift Bar in China' where a customer can buy gold as a gift complete with engraving and can sell it back to the ICBC for cash.

"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. There are also no individual property rights in China, so all the gold citizens own really belongs to China, whether the country would confiscate it is a different story.

ICBC, the world's largest bank by market value, sold 7 tonnes of physical gold in January this year, nearly half the 15 tonnes of bullion sold in the whole of 2010, said Zhou Ming, deputy head of the bank's precious metals department on Wednesday.

"We are seeing explosive demand for gold. As Chinese get wealthy, they look to diversify their investments and gold stands out as a good hedge against inflation," Zhou said.

"There is also frantic demand for non-physical gold investments. We issued 1 billion yuan worth of gold-price-linked term deposits in 2010, but we managed to sell the same amount over just a few days in January this year," Zhou said, adding that such deposits would easily exceed 5 billion yuan ($759 million) this year.
Not only that, but gold production in China remains at an all time high. The Chinese state news service has stated that the country's gold production hit a new record last year with over 340 tons produced. That's over eight percent on the previous year.

The Chinese state news service has stated that the country's gold production hit a new record last year with over 340 tons produced. That's over eight percent on the previous year. China is now the world's top gold producer after overtaking South Africa in 2007. And the state-run Xinhua News Agency recently cited the China Gold Association as saying last year's output was 340.88 tons, an increase of more than 26 tons from the previous year. The report also says China's top gold-producing provinces last year were Shandong, Henan, Jiangxi, Yunnan and Fujian.

So why but and hoard all this gold. What is China going to do with it? Corner the gold market? Well there is some speculation going around in the gold community that might just explain this. China wants the yuan to become the world’s reserve currency and the way to do it is to buy up all the gold available and add it to their already massive hoard and peg the yuan to it. There would be then, incredible as it may sound, a yuan gold standard.

And China may just hold the whip hand to do this. China's central bank holds around 1,054 tones of gold or about 1.8 percent of its total reserves.

Of course it is going to require much more gold than it has now. Some estimates put it at 66, 000 tones, but that is with the current rate of the yuan against the dollar and the current price of gold. The more the price of gold increases the less gold China will need in order to back their currency. And the more gold china buys the higher the price will climb. So they are setting their own pace, as it were, in how much gold they will need in order to become the standard.

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 China holds 2.85 trillion dollars in foreign reserves. It is the major trading partner to the west and could easily, given enough gold at the right price, peg its currency against the and no one could really do anything about it.

The USA, currently the world reserve currency, is reported to hold over 8,000 tons of gold, but as it refuses to have this audited and is accumulating debt like and express train going downhill with no breaks. The excessive printing of dollars means the US has no hope of pegging the dollar to gold, not with a measly 8,000 tones. It would place the gold price at somewhere around 52,000 dollars and the more dollars are printed the higher the value of gold would have to be.

The Chinese yuan, however, is a slightly different story. China holds $2.85 trillion in foreign reserves, mostly dollars and as the value of the dollar decreases with excessive printing of more, the foreign reserves of china lose their value and the value of the yuan increases.

Whether or not China does eventually accumulate enough gold to create a new world gold standard, it certainly gives new meaning to the words, buy gold!



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