When we look at the hard numbers, China has a fairly small portion of the worlds gold reserves at somewhere around 1,000 tons. While that seems like a large number, when compared to the U.S.’s 8,000 tons or Europe’s 10,000 tons it isn’t so much. However in an article written by Addison Wiggin, he claims the amount of gold holdings is much higher, close to 5,000 tons. This seems like a reasonable number when you consider they made the statement about their gold holdings early in the year,and have since been buying around 200 tons of gold every month since then.
The question analysts ask is why. Why is China quietly buying up all this gold? Part of the reason can be that the world’s backup currency (the U.S. dollar) is in freefall, and it is a reasonable thing to do to protect ones national wealth in the event the dollar crashes. Given the fact that China owns about 7% of the U.S. debt and only has roughly 3.3 trillion U.S. dollars in their reserves, adding some protection in the form of precious metals makes sense.
However as I see it there is at least one other good reason to buy up all that gold. Currently a Yuan is worth about 16 cents American. With the U.S. and Europe in a race to the bottom to debase their currencies China could be presented with an excellent opportunity to grab the reins by moving to a gold standard. Doing so could force the Yuan into being the world’s backup currency and springboard them into being a legitimate economic superpower.
Critics would argue that making this move would be detrimental to their economy as they are entering a slow down in growth, but with the rise of an ever growing middle class (that some project will be larger than the population of the entire U.S.) a move to strengthen the currency could boost internal investing and lead to the formation of a legitimate Wall Street like marketplace in China.
From the research I’ve done, the good seems to outweigh the bad across the board. If you have come to the same conclusions then there are two ways to play this move from what I gather. Buy gold, or buy the Yuan. For me the currency is a much more attainable assets as gold still sits around $1300/oz. Whereas for the price of 1/oz, I can buy up about 10,000 Yuan. I would speculate a move to a gold standard would take the Yuan up to around a 1:1 or even 1.25:1 trade rate with the dollar, making your payout equal about 10x your investment. Seems good to me.
That is it for this time, I’ll try to have another post up tomorrow. Any questions, comments, etc, leave a comment a I’d love to discuss this more. Who knows, maybe I will tomorrow.
Note: For those curious about sources, wiki provided the reserve numbers, the gold holdings are from a Forbes article by the aforementioned person, and the other data comes from goldseek.com