China’s Monetary Ascension Is Paved With Gold

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Originally Published on Money Metals Exchange

The world monetary order is changing. Slowly but steadily, global trade and currency markets are becoming less dollar-centric. Formerly marginal currencies such as the Chinese yuan now stand to become serious competitors to U.S. dollar dominance.

Could gold also begin to emerge as a leading currency in world trade? Over time, it certainly could. But the more immediate implications for gold's monetary role center on its increasing accumulation by central banks such as China's.

On Oct. -, the Chinese yuan is slated to enter the International Monetary Fund's Special Drawing Right ( SDR ) basket of top-tier currencies. It will share SDR status with the U.S. dollar, euro, British pound and Japanese yen.

Before the yuan officially becomes an SDR currency, the World Bank intends sell $-.8 billion in SDR bonds in Chinese markets. The rollout of SDR bonds in China began Aug. '-. According to Reuters, China's promotion of SDR bonds "is part of a wider push in China to… boost demand for Chinese yuan and diminish reliance on the U.S. dollar in global reserves."

King Dollar will not be dethroned overnight. But the place of prominence the U.S. dollar - more accurately called the Federal Reserve Note - enjoys as the world's reserve currency will indeed diminish over time.
Yuan's Inclusion in the SDR Currency Basket: Merely a Part of China's De-Dollarization Strategy

China and Russia have mutual geostrategic interests in helping to promote de-dollarization. Toward that end, the two powers are engaging in bilateral trade deals that bypass the dollar. Annual bilateral trade between China and Russia has surged from $-6 billion in -……' to nearly $-…… billion today. When China hosts the G-… summit in September, it will make Russian President Vladimir Putin its premier guest of honor.

U.S. officials are none too pleased. They fear Putin aims to expand his global reach by forging stronger ties with China.

According to the South China Post, "Some Western analysts have viewed the recent, rapid enhancement of such collaboration as the beginning of a partnership set on destabilizing the U.S.-led world order and diminishing Washington's capacity to influence strategic outcomes."

Some in the Hillary Clinton campaign even fear that Russia will interfere in the upcoming U.S. election to try to block Clinton's path to the White House. Russian hackers have been implicated in a number of recent "leaks" that damaged the reputations of U.S. banks and the Obama administration. Wikileaks founder, Julian Assange, has hinted at further releases. Hillary's allies openly speculate that these Wikileaks hacks are being sourced from Russia.

But the Russians and the Chinese are not counting on cyber warfare to dethrone King Dollar. In addition to bilateral trade deals and strategic plays for regional economic dominance, the two powers are bulking up on gold. Over the past several years, Russia and China have each been adding massively to their gold holdings.
World's Central Banks Becoming Net Gold Buyers

Since -……9, China's officially reported gold holdings have jumped by 6…%. The enlarged gold stockpiles held by the People's Bank of China helped China win ascension into the IMF's elite SDR currency basket.

It is part of a larger trend of world central banks becoming net gold buyers. They were net sellers throughout much of the -99…s and early -………s. That helped keep gold prices suppressed. But since -…-…, central banks have been net buyers of gold - to the tune of more than 5…… tons per year.

Russia alone added -7- tons of gold in -…-4, and -…8 tons in -…-5. By swapping some of its U.S. Treasury securities for bullion bars, the Russian central bank has become the world's seventh largest gold holder. Yet gold makes up just -6.-% of Russia's monetary reserves, which is a lower proportion held by its Eurozone neighbors.

Russia likely is not done accumulating. As the world's third largest gold producer, Russia can readily supply itself with more.

A similar scenario figures to play out in China, perhaps even more dramatically so. China's "official" gold hoard of -,8-' tons, as of August -…-6, gives it the world's sixth biggest gold reserve. Yet relative to the size of China's economy and currency supply, its gold stash does not amount to much - just -.'% of total monetary reserves.

Unofficially, China likely has additional gold reserves that it does not report. But even if China's real gold stash is double or triple what it actually reports, as some analysts suggest, that still leaves the country of -.' billion people with far less gold backing than Russia, the United States, Europe and some of its Asian rivals. China has a lot more gold accumulating to do in the years ahead.

Chinese leaders aim to be regionally dominant. In order to secure that position, they are moving to own and control greater shares of the gold market. The recently opened Shanghai Gold Exchange gives China a direct mechanism for controlling the physical gold market in Asia.

It is a way for China to take at least some control away from Western governments and banks that have traditionally dominated the gold trade out of London and New York.

When the Chinese yuan becomes an SDR currency this fall, that could be the inflection point for a new multi-polar currency regime that sees the Federal Reserve Note decline in stature as central banks scramble to stock up on the ultimate money, gold.

Disclosure: We do not own any of the stocks may have been discussed in this article.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
Referenced Symbols: SDR , C

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