Could gold, the world’s oldest traded currency, be the foundation on which to create a new global order in international finance? The Central Bank of the Republic of China has long been said to be looking into backing the Yuan with the precious metal.
Ken Hoffmen, the head of global metals and mining research for Bloomberg magazine, says it could mean a global economic upheaval.
But why is China considering this forceful move? Hoffman claims that Chinese fiscal policymakers have been working to establish the Yuan as a form of reserve currency for some time now and that by backing it with gold they would attract much more foreign investment capital.
It is expected that China will receive approval soon, if they haven’t got a green light already from the country’s central bank, to announce its Yuan-denominated gold fix.
Hoffman went on to explain that a Chinese gold standard would not be likely to create any considerable constraint on the Chinese Central Bank as many experts believe it would. “They could fix it at any price,” he said. “There are a lot of things they could and may do to make it work.”
He estimates that in order to set up an exchange rate of $64,000 for each ounce of gold, China would need as much as 10,000 metric tons of gold. “That’s nine times the amount they currently have, according to their official holdings record. It’s roughly 6% of the total bullion ever mined in history.”
Adopting a new gold standard could also be an opportunity for China to achieve a never before seen level of power and influence. When the United States adopted the gold standard after the end of World War II, it was soon recognized as the world’s main global superpower within the International Monetary Fund. In the early 1970s, the US ceased using the gold standard, rendering the US Dollar a fiat currency.
If China does choose to opt for some version of the international gold standard, Hoffman believes that it would cause the rest of the global community to once again consider gold to be a currency.
“If they follow through with this,” he said. “It would mean fireworks.”
Once the announcement came out two years ago that China was considering the gold standard, gold futures settled at $1,171.80 per ounce.
As the global markets stand by and watch China’s recent performance, Bloomberg analysts consider the possibility of the country actually following through with its plan.
Could this Stabilize China’s Volatile Currency?
Bloomberg analysts believe that it may be wise for China to explore new styles of the gold standard before settling on one version.
“Putting itself on a gold standard used by other countries would be more or less impossible for China at current gold prices,” Hoffman said. “That won’t rule out the gold standard, but it makes many of the alternatives worth considering.”
The Chinese government has been surreptitiously gathering a significant amount of gold over the last several years. Today China has become the world’s top producer as well as the number one greatest consumer of gold. It is believed that in order to hold on to all of their domestic gold production, and the significant amount they import from other nations, they would have to make a drastic change to their economic system soon. A change such as selecting the gold-backed standard.
Furthermore, the Chinese have been buying gold mines all around the world at drastically reduced prices. How they negotiated these deals may be a matter of concern. They have also been bringing home all of the gold that they have had stored in New York, London, and Switzerland.
At the moment, China has two operating currencies; an internal currency and an external currency. The country would not have to initiate the gold standard at the current market price. It could simply introduce what would be called a gold-backed note. This would reduce the saturation of the oversupplied Yuan, and potentially stabilize their existing currency.
Markets around the globe were rattled recently when the Chinese Yuan suddenly and unexpectedly plummeted in value. It has been speculated that Chinese officials intentionally pushed the currency down as a response to the large selloff of China’s equity market– the Shanghai Stock Exchange. The result has been global equities being made vulnerable and gold prices being ratcheted up due to safe-haven appeal.
“If Yuan keeps struggling,” Hoffman said, “this move could become even more attractive to them.”
Regards,
Ethan Warrick
