That’s the question on the mind of gold bugs everywhere. And the answer could determine the precious metal’s direction in the foreseeable future.
Xia Bin, for one, thinks China will increase their gold holdings. Mr. Bin is chief of the Financial Department of the Development and Research Centre, an influential Chinese think tank.
In a recent interview with Reuters, Mr. Bin said, "India’s okay with it, why shouldn’t we be? What’s the use for so many dollars, whose purchasing power is weakening anyway? With so many foreign reserves in hand, I think China should buy [gold], without doubt." [emphasis mine]
China is the largest producer and consumer of gold in the world. Yet only 1.9% of their reserves are in the yellow metal. (Globally, the average is 10% of reserves in gold. India recently increased its holdings to 6% when they purchased 200 metric tonnes from the IMF.)
What would happen if China follows in India’s footsteps? David Rosenberg, chief economist at Gluskin Sheff, tackled this question in his most recent newsletter. According to his research, the increased demand from China boosting their gold reserves to 6% would drive the price of gold north of $1400.
Rosenberg also analyzed what would happen if the U.S. went back to backing 40% of total monetary base with gold. They say that would drive price per ounce all the way to $2750. America isn’t buying gold any time soon, but it is interesting to note how sensitive prices are to purchases by central banks.
China is also gobbling up stakes in mining projects for commodities like copper and iron across the globe. They’ve managed to snag a near-monopolistic hold on rare earth elements, which are crucial to alternative energy and other next-generation technologies.
Holding the Cards
China is an emerging economic superpower. GDP growth, while probably manipulated by a few points, remains high. The U.S. is more reliant on them (and other lenders) than ever. China, on the other hand, is working hard to become less reliant on exports to the West.
If they’re successful, this will allow them to shed dollar assets and/or allow their currency to float against America’s. Either way, the greenback will suffer. Such a move would drastically shift global trade balances.
It should also benefit gold in two ways. First, price would be driven up as countries directly increase their precious metal holdings. Second, owners of gold would be protected from a depreciating dollar, as countries continue to diversify their assets.
China, alongside its BRIC (Brazil, Russia, India, China) fellows, is clearly positioning itself for a world in which the dollar is no longer king. Gold will play a big role in this shift.
Personally, I’m preparing for the possibility that this will happen sooner than many analysts think. After all, if China planned to increase gold reserves or let their currency rise, would they telegraph the move for all to see? Of course not. . .
The Chinese renminbi (also referred to as the yuan) may even compete with the dollar for the role of world reserve currency. And it could happen in the next 10-15 years.
That’s according to Robert Zoelick, chief of the World Bank: "Over the next 10-15 years, you will firstly see renminbi to be internationalised and provide an alternative [to the dollar]."
Mr. Zoellick also issued a warning on America’s reckless fiscal policies: "My caution to the United States is that you have to fix your deficit and budget issues and don’t take it for granted this incredibly blessing we earned through the hard work in the first 200 years or so."
I’ve never much liked the World Bank, but Mr. Zoellick’s comments are dead-on in this case. That said, things aren’t likely to change any time soon. And until they do, investors can protect themselves by owning commodities (precious metals) and buying companies with global reach. Firms with large international presences will weather currency shifts better than those without.
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