Buying up the world's gold - China's long term motive
China is buying gold as part of a long term strategy to position itself ultimately as the global currency of choice and to the benefit of its citizens who it has encouraged to buy precious metals.
Posted: Tuesday , 08 Nov 2011
Gold imports into China via Hong Kong are continuing to boom with the total for the quarter to September exceeding the total amount for the whole of 2010. Ever since China loosened its restrictions on precious metals purchases, and indeed started selling the idea of gold and silver investment to the general populace via its state-owned banks (see: China pushes silver and gold investment to the masses), the Asian superpower has rapidly begun to challenge India as the world's largest consumer of gold. Given that it is largely believed that the Chinese state is taking in all its own mined gold (it is currently the world's largest gold producer) into its reserves without declaring the increase, the combined offtake within China of market purchases by the general population plus the amount being taken into its state coffers will soon be getting perhaps close to one third of total world gold output and rising ever faster.
China has always taken the long view and plans for eventualities years in advance. Nothing on the global front is unplanned. This has been seen with the ever increasing number of critical metals and minerals for which China has a virtual monopoly of the global market - rare earths is the most obvious example, but there are a number of other metals where China now provides around 90% of global supplies. Imposition of export quotas ostensibly to protect its own industries then follows, forcing prices up to unprecedented levels, and also forcing companies which require these metals as key parts of specific manufacturing processes to move their plants to China as that is the only way they can guarantee supplies, thus benefiting the Chinese economy as well as helping build employment in the world's most populous country.
Indeed, of the top 20 metals and minerals identified as being at significant supply risk compiled by the British Geological Survey in a recent report production of no less than 11 of them is dominated by China.
So what is China's plan with gold? There almost certainly is one. It can't be a case of tying up global supplies like it has with those critical metals because it doesn't, and can't, control enough of global supply to do that. The logical conclusion is that China is building its total reserves within the country in terms of both its government holdings and as an investment for individuals as it is convinced that the only way for the gold price to go is upwards, and perhaps the only way for the US Dollar and Euro to go is downwards - and ultimately, several years hence, it will move towards making the renminbi either the world's global reserve currency, or a significant part of it and reap the kind of benefits the USA has been able to since the dollar became the de facto global reserve currency.
China is a nation of gold believers, but is prepared to build its reserves gradually over a period of years to towards the purported 8,000 tons plus held by the U.S. Federal Reserve. It has a way to go yet and although it could do so more quickly by utilising its huge $3 trillion surplus to buy gold on the open market it would rather do so surreptitiously and gradually so as not to unduly accelerate the price of gold. This will thus allow its own citizens buying gold as an investment and inflation hedge to benefit and, importantly, allow it to filter down more as the Chinese middle class continues to build.
It has also set up the Pan Asian Gold Exchange (PAGE) which many feel is destined to be much more than that which its name suggests. Not only will it enable buyers to bypass the bullion banks and the LBMA, but it will also provide a path for the international investor to buy renminbi. As the financialsense.com website pointed out ahead of PAGE's opening "PAGE also provides a new way for international investors to own Chinese currency - the Renminbi (RMB). Here's how: The buyers will purchase gold contracts denominated in RMB. They can then hedge out the gold in the dollar-based gold markets. As a result, they effectively own RMB.
"We see here yet another example of multiple Beijing initiatives opening the RMB to world investors. Over time, these innovations will enhance the value of the RMB and create a deeper, more liquid foreign exchange presence for the Chinese currency. PAGE is another internationalization step forward for the RMB in the direction of world reserve currency status.
"The advantages of being the world reserve currency, as well as the responsibilities involved, have not been lost in the Chinese government."
As we said earlier in this article - China has always taken the long view and plans for eventualities years in advance. - The renminbi as the global world currency is probably many years away yet, but the day is getting closer and we would surmise that building its gold reserves is a key part of the long term Chinese plan to exert renminbi hegemony andreplace that of the once-mighty dollar. And its people who are relentlessly hoovering up gold as it is sold off by the West will be double beneficiaries of this long term planning.
iPad Version: Picture - REUTERS/Claro Cortes