China’s Appetite for Gold

China’s Appetite for Gold

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China is pushing for a collapse of the hegemony the U.S. dollar holds in the global economy.

Over the past 15-20 years, both China and Russia have been ambitiously acquiring gold and bolstering their gold reserves.

As China’s global economic influence increases, it is important to keep an eye on international gold news today.


Why is China Accumulating Gold?

This gold accumulation by Russia and China is as a strategy to shift away from international trade dominated by the US dollar and back in the direction of gold-backed currencies.

The Bank of Russia, on behalf of the Russian Federation, claims to now hold 1828 tons of gold. The People’s Bank of China (PBoC), on behalf of the Chinese state, claims to hold 1,842 tons of gold. In comparison, official US gold reserves purportedly amount to 8133.5 tons of physical gold.

However, compared to a decade ago, Russia and China have increased their combined gold reserves dramatically. They now hold a combined 3670 tons of gold. As recently as 2001 the PBoC had less than 400 tons of gold. Likewise, the Bank of Russia only held 400 tons of gold a decade ago.

Currently the U.S. dollar is a global currency and all international transactions are priced in dollars. Many countries that trade with America peg their currencies to the dollar to mitigate wide swings in inflation or deflation. However, lately, there has been some retaliation from countries such as Russia and Venezuela in the form of trade deals not priced in dollars.

China – itself one of the largest foreign holders of the U.S. dollar – has been calling for a replacement of the U.S. dollar as a global currency.


Why it is important for a country to have large gold reserves

Even though the global economy is not backed by gold, it is important for countries to have gold in reserves as an asset of last reserve. Gold as an asset holds eminence and has historically retained its value. When it comes to a crisis, having vast gold reserves is like having a fully stocked war chest.

If the global economy does shift to a gold-backed currency, more gold will translate to more power.

Among official reserves, the People’s Bank of China remains the 21st Century’s heaviest gold buyer to date.


China’s supply of and demand for gold

It’s not just the Chinese government that sees gold as a valuable asset. Chinese consumers and households have been investing heavily in gold and gold jewelry over the past decade.

China’s insatiable appetite for gold is fed in part by its own reserves. China now consistently ranks as the top global producer of gold. China’s gold mines produced 300 tons of gold in 2008 and 453.5 tons of gold in 2016. Since 2017, Domestic mining is the country’s number second largest source of gold, after imports. China now far outpaces the next two largest producers of gold, Australia and Russia. According to a statement issued in October of 2017 by the Vice Chairman of the China Gold Association (CGA), China has 12,100 tons of ‘proven’ gold reserves.

China aims to increase its annual gold production to 500 tons by 2020. However, China’s gold output has fallen slightly in more recent years due to tighter environmental regulations. Gold consumption has also risen year on year by 10 percent, up to 545 tons in the first half of 2017.

Interestingly, according to Thomson Reuter’s GFMS, Chinese household demand for gold bars was “sluggish” through most of 2017. In the same vein, jewelry consumer trends indicate a continued shift away from pure gold to lower-carat fashion merchandise.

While the gold jewelry market bottomed out in 2016, it is undergoing a modest recovery and according to an analysis from Metals Focus, China’s gold investment demand is predicted to grow another 6 percent in 2018.


What does China’s interest in gold mean for global currency

It is likely that China’s gold strategy is to topple the U.S. dollar’s eminence and shift to a gold-backed currency.

Globally, demand for physical gold remains strong. Investors in larger markets such as Germany, Switzerland, Austria, Canada, and the U.S. know the value of holding physical gold, not just paper promissory notes.

If it comes to light that the U.S. has less physical gold than it claims, it would have a negative impact on the U.S. dollar. However, it doesn’t necessarily mean that the U.S. dollar would be immediately weakened or that an immediate change in global trade practices. If U.S. gold reserves are surpassed by Chinese and Russian gold reserves, it remains to be seen how the countries would use their power to sway international trade.

The U.S. is very secretive about its official gold reserves, yet both the Chinese and the Russians are secretive as well. The difference lies in how they speak about gold on the global stage: America downplays its role as a monetary asset, while the Russians and Chinese openly discuss gold’s strategic importance.

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