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China's Gold Buying Policies

A little published figure showed up in gold holdings at the end of 2018.  Chinese officials announced that their official gold holdings rose for the first time in two years.  The data from the People’s Bank of China reported that gold holdings jumped in December 2018 to 59.560 million fine troy ounces. 

Although the jump was small, the signal poses a question – “Why?”

One massive theory (well massive if it is correct) comes from Alasdair Mcleod on China’s motives.  His theory: China is buying gold in preparation for the yuan to replace the dollar in for China’s trade. 

Such a move would require China to back its trade with something.  Gold? 

“It is hard to see how the US can match a sound-money plan from China. Furthermore, the US Government’s finances are already in very poor shape and a return to sound money would require a reduction in government spending that all observers can agree is politically impossible. This is not a problem the Chinese government faces, and the purpose of a gold-linked jumbo bond is not so much to raise funds; rather it is to seal a price relationship between the yuan and gold.  In his own words:

Whether China implements the plan suggested herein or not, one thing is for sure: the next credit crisis will happen, and it will have a major impact on all nations operating with fiat money systems. The interest rate question, because of the mountains of debt owed by governments and consumers, will have to be addressed, with nearly all Western economies irretrievably ensnared in a debt trap. The hurdles faced in moving to a sound monetary policy appear to be simply too daunting to be addressed.

Ultimately, a return to sound money is a solution that will do less damage than fiat currencies losing their purchasing power at an accelerating pace. Think Venezuela, and how sound money would solve her problems. But that path is blocked by a sink-hole that threatens to swallow up whole governments. Trying to buy time by throwing yet more money at an economy suffering a credit crisis will only destroy the currency. The tactic worked during the Lehman crisis, but it was a close-run thing. It is unlikely to work again.

Because China’s economy has had its debt expansion of the last ten years mostly aimed at production, if she fails to act soon, she faces an old-fashioned slump with industries going bust and unemployment rocketing. China offers very limited welfare, and without Maoist-style suppression, faces the prospect of not only the state’s plans going awry, but discontent and rebellion developing among the masses.

For China, a gold-exchange yuan standard is now the only way out. She will also need to firmly deny what Western universities have been teaching her brightest students. But if she acts early and decisively, China will be the one left standing when the dust settles, and the rest of us in our fiat-financed welfare states will left chewing the dirt of our unsound currencies.”

Could China really be the country that ushers in a new gold era, an era of sound money policy?  It seems preposterous on its surface given the massive amounts of fiat currency debts western countries would have to deal with.  It’s possible, though.  Of course, other countries won’t go silently into the gold standard again.