In supporting that last argument in Part One, it is observed that China is reducing its holdings of US-dollar treasuries — it has been a net seller for the last two months. According to the U.S. Treasury department’s Web site, in November 2010, the country lent the U.S. $895.6 billion, which was down 3.6 percent from the same period a year earlier. “China has shortened all their maturities to less than 5 years and now they are not as strong in the auctions,” argues Chuck Butler, president of EverBank. Speculation is bubbling that the country is shying away from the dollar to make more room for another asset; could that be gold?
But others have poured scorn on the idea. Jon Nadler, senior analyst at Kitco.com, argues that China loves growth too much to switch to a gold standard, and “forget about 8% growth.” If China supports its currency with gold then it will be forced to limit the amount of money in circulation, which could hurt the economy. “This is a far-fetched dream by the gold bugs,” he has said.
Putting the yuan onto a gold standard may not be the intended outcome, though; we would suggest an alternative objective might be to soak up excess liquidity in the economy and hence reduce inflationary pressures. Encouraging citizens to buy cars, white goods and electronics is good for industry, but the rate of growth has been so rapid aided and abetted, one should add, by the stimulus measures introduced by Beijing in the aftermath of the financial crisis and has since largely wound down that it has brought price inflation with it. Raising interest rates and bank reserve requirements has the desired effect of slowing demand, but at the additional cost of raising costs for industry. Giving the population something else to speculate on apart from property prices could be the intent. Nor can we see how encouraging the public to buy gold furthers the aims of a currency reserve standard — India has been the largest importer of gold for many years, most of it bought by the general public, yet the rupee is a long way from the front runners as the next reserve currency.
Whatever Beijing’s intent, it has undoubtedly supported the gold price over the last year and that policy is, like so many other metals, likely to impact gold prices this year and next to an even greater extent.
MetalMiner and its sister site, Spend Matters, along with Nucor, will host a live simulcast, International Trade Breaking Point on March 1, 2011. If your company sources products from overseas, you will not want to miss this half-day event: