China Encourages Citizens to Buy Gold, Part 1

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Just why are the authorities in Beijing so actively supporting widespread purchases of gold and financial gold instruments? China has also been telling its citizens to buy gold, promoting different gold funds, giving investors access to overseas products and launching a global gold contract based in yuan by the Chinese Gold & Silver Exchange. On the face of it, this seems like a strange position to take; at the very least we have come to expect governments to be neutral on their citizens’ investment choices, sometimes downright negative such as raising interest rates to dampen property or stock market bubbles, but rarely so overtly supportive towards investing in speculative and volatile commodities. One has to ask: what would the social fallout be to a collapse in the gold price, and would there not be some resentment in being so aggressively encouraged to buy?

China’s desire for gold is not solely reserved for the man and woman on the street. According to a Reuters article, gold imports into China soared in 2010, turning the country, already the largest bullion miner, into a major overseas buyer for the first time. The same article said China imported 209 tons of gold in the first 10 months of last year, versus 333 tons by India for the whole year, making China second to India the largest gold market and accelerating fast enough to take top slot this within a year or two. The US by comparison bought 233.3 tons.

Theories abound as to why China is buying gold both for its central reserve (which now stands at 1054 tons, or about 1.8 percent of it central bank reserves), and encouraging its citizens to hoard gold as well. The front-runner is that China is on a drive to have the yuan accepted as the world’s reserve currency and amassing gold will improve investor confidence, if you like a return to a gold standard. If that were really the plan, China would have a profound impact on the gold market. As TheStreet.com points out, China holds $2.85 trillion in foreign reserves, which means the country would need to buy roughly 66,000 tons of gold to fully back its currency. Even if the country raised its holdings to just 3 percent, the country would need to buy 1,000 tons. The article goes on to point out that technically, a full gold standard isn’t an option. Under the IMF’s first amendment to Article IV of Agreement, ratified in 1978, participating countries are not allowed to peg their currency to gold, but that doesn’t undermine the attraction of carrying large gold reserves as an expression of solidity.

(Continued in Part 2.)

–Stuart Burns

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Comments (7)

  1. Ronnie Nussbeck says:

    China’s buying of Gold and initiating gold buying for the public is no less than an attempt to corner the gold market. The strategic value is self evident, dominate the world’s financial markets within five years. While governments around the world sold off their gold for a fraction of it’s worth India and China continue to buy the majority of gold sold so cheaply, stupid Americans??? While the U.S. prints money in a back room (QE1 & QE2) prepares to print QE3 & QE4 and the printing becomes procreation by simply the only buyer of the U.S. debt in the future is the U.S….
    Every dime printed by the U.S. and other governments (you don’t think the U.S. is the only one printing money in a back room, do you?) makes China and India stronger. China has been telling their citizens to buy Silver leaving everyone else holding worthless paper, do you see a plan emerging by China? The transfer of wealth is taking place and no one has sounded the alarms except the conservatives while President Obama tries to drown out their voices, silly rabbit, the rules are simple? Who ever has the gold and silver makes the rules………

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