Is China Preparing a Gold Standard?

Posted by  – Tuesday, August 21st, 2012 via Wealthwire

 

The renminbi is the official currency of China used as legal tender in China’s mainland. But what will happen to the renminbi if China does begin backing the currency with gold? Will it branch out into other foreign economies as a reserve currency for them as well? Perhaps…

Some sources believe the international acceptance of the currency would soar to unprecedented levels if China does initiate a new gold standard. It’s the same reason the U.S. dollar became a global reserve currency decades ago.

Officials, investors, and financial planners have advised everyone in China to buy gold on relative weakness because it is the only safe have for risk-averse investors, according to Zhang Jianhua from People’s Bank of China. Since 2011, Jianhua has been preaching his message, declaring that no other assets are safe in these volatile market conditions. Hard currency, gold in particular, is the only choice to hedge risks.

He advised the Chinese government to buy gold on dips, saying, “The Chinese government should not only be cautious of the imported risk caused by rising global inflation, but also further optimize its foreign-exchange portfolio and purchase gold assets when the gold price shows a favorable fluctuation.”

And that’s exactly what Chinese people and China’s government have been doing – stockpiling gold. From May 2010 to April 2011 China imported approximately 66 tonnes of gold. Fast forward to April of 2012 and imports were at 489 tonnes. That’s an increase of 640%. Meanwhile, several sources indicate their belief that China is holding much more gold than they are officially confirming – they have confirmed 1,054 tonnes so far.

Take a look at this chart to get a clearer idea of just how drastically Chinese gold imports from Honk Kong have increased from September 2009 to March of 2012.

gold tonnes
*Sources: Datastream, Bloomberg, Reuters, Erste Group Research, image courtesy of GoldSilverWorlds.

If China does, in fact, move towards a gold standard, it will be great for all you gold bugs. Despite a weakened gold demand from India driving overall weakness in gold’s figure, China is about to beat India “for the first time on an annual basis as the largest gold market in the world, with demand reading at least 850 tons and possibly more than that,” said Marcus Grubb, managing director at the World Gold Council.

With one of the world’s biggest gold reserves and exponential increases like the ones shown in the graph above, there’s no doubt that it’s likely only a matter of time before you’ll officially receive news about China’s gold-backed renminbi…

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