Wednesday, August 22, 2012

Is China going for Gold Standard?

Every country has the sovereign right freely to determine what legal tender within its own borders. 
According to definition, denomination of a country's currency, by law, must be accepted as a medium for commercial exchange and payment for a money debt. 
While usually all denominations of the circulating paper money are legal tenders, the denomination and amount in coins are acceptable as legal tender varies from country to country.

It is interesting to learn that if mainland China begins backing its renminbi with gold. Let’s see what Brittany Stepniak said about this in his article “Is China Preparing a Gold Standard?” see below: 
The renminbi is the official currency of China used as legal tender in China's mainland. But what will happen to the renminbi if China does begin backing the currency with gold? Will it branch out into other foreign economies as a reserve currency for them as well? Perhaps...

Some sources believe the international acceptance of the currency would soar to unprecedented levels if China does initiate a new gold standard. It's the same reason the U.S. dollar became a global reserve currency decades ago.

Officials, investors, and financial planners have advised everyone in China to buy gold on relative weakness because it is the only safe haven for risk-averse investors, according to Zhang Jianhua from People's Bank of China. 
Since 2011, Jianhua has been preaching his message, declaring that no other assets are safe in these volatile market conditions. Hard currency, gold in particular, is the only choice to hedge risks.

He advised the Chinese government to buy gold on dips, saying, "The Chinese government should not only be cautious of the imported risk caused by rising global inflation, but also further optimize its foreign-exchange portfolio and purchase gold assets when the gold price shows a favorable fluctuation."

And that's exactly what Chinese people and China's government has been doing – stockpiling gold. From May 2010 to April 2011 China imported approximately 66 tonnes of gold. Fast forward to April of 2012 and imports were at 489 tonnes. That's an increase of 640%. Meanwhile, several sources indicate their belief that China is holding much more gold than they are officially confirming – they have confirmed 1,054 tonnes so far.

If China does, in fact, move towards a gold standard, it will be great for all you gold bugs. Despite a weakened gold demand from India driving overall weakness in gold's figure, China is about to beat India “for the first time on an annual basis as the largest gold market in the world, with demand reading at least 850 tons and possibly more than that," said Marcus Grubb, managing director at the World Gold Council.

With one of the world's biggest gold reserves and exponential increases like the ones shown in the graph above, there's no doubt that it's likely only a matter of time before you'll officially receive news about China's gold-backed renminbi. 

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