Central banks worldwide are engaging in significant gold purchases, with China leading the way by acquiring historic quantities of the precious metal. The intentions behind China’s gold accumulation have sparked speculation. Recent reports indicate that China’s central bank has purchased nearly a quarter of global gold production this year alone, surpassing other central banks in terms of gold acquisitions. Over the past few months, China has added 16 tons of gold to its reserves, bringing the total purchased since November to 144 tons. These purchases would increase China’s total gold holdings to approximately 2,100 tons. To finance these acquisitions, China has reduced its holdings of U.S. government treasuries by almost a quarter, from $1.1 trillion to $850 billion since 2021.
There are two interpretations regarding China’s shift away from the U.S. dollar. The conventional argument suggests that China is taking precautionary measures in case the U.S. weaponizes its own currency, following similar actions taken against Russia and potential threats to other countries over LGBT policies. In this view, the solution would involve reinstating leaders who understand the importance of a reserve currency and can navigate beyond domestic political issues. However, there is also a nuclear story that suggests China is amassing gold in preparation for a gold-backed currency. Both China and Russia have considered the idea of gold backing, but it is unlikely that China would back its own currency, the yuan, with gold. This is because a paper yuan allows China to maintain lower export prices and manipulate inflation. Instead, the notion is for China to introduce a new currency, possibly tied to the BRICS anti-dollar bloc, and support it with gold.
The impact of a gold-backed currency introduced by China would be significant, potentially leading to a major shift away from the U.S. dollar as a global store of value. Currently, countries like Mexico and Korea utilize their own currencies domestically while leveraging the strength of the U.S. dollar for international trade. This strategy allows for cheap exports and a stable trade system. However, if China were to introduce a gold-backed currency, it would disrupt the status quo. The U.S. dollar’s appeal as a reliable and liquid store of value would diminish, as gold holds a much stronger value in comparison. Over the past 20 years, the dollar has experienced an 85% decrease in value when measured against gold. Nonetheless, it is important to note that gold is not as easily exchangeable as traditional currencies. Therefore, a gold-backed currency from China would likely take time to gain trust and credibility. However, with continued trading and acceptance, confidence in the new currency would gradually increase, leading to a potential transformation of the global currency landscape within three to five years.
If China indeed pursues a gold-backed currency, the question arises as to how much gold they would require. Before the U.S. abandoned the gold standard, the country only had around 2% gold coverage, meaning there was $2 worth of gold for every $100 in M2 (a measure of money supply). Based on this ratio, China’s current gold holdings of 2,100 tons could theoretically back a new currency worth approximately $6 trillion, making it the world’s largest currency after the Japanese yen. Whether China possesses the confidence to execute such a strategy remains uncertain, but if they do, it would have far-reaching consequences. The implications of this move would be significant and could catch other nations off guard. Only time will tell, and we will closely monitor the situation for further developments. Until next time.
