In These New Times

IBTimes

23rd November, 2011

China On Gold Buying Binge, Altering World Market Prices

China‘s think tanks are on it again. Long before the 20^th century fiscal crisis happened, the country’s brilliant economists and analysts had long prepared the Asian country to counter possible ill effects of a slowing down economy. Proof of that had shown China‘s continuing resilience compared to the Eurozone’s impending financial crash.

And it what seems to be another macro-economic preparation, China has been encouraging its citizens to buy and hold physical gold, either in jewelry, coins or in bullion bars, in a bid to build financial reserves in assets stronger than the U.S. dollar, euro, and other weakening currencies.

China has been buying into the global gold market and had made it easier for investors to buy and invest in the yellow metal. In fact, Chinese consumer demand for gold hiked 25 per cent overall this year, higher than the 7 per cent global average.

“The bottomline (really is), China wants to dislodge the dollar as the world’s main reserve currency,” Larry Spears wrote in moneymorning.com.

The World Gold Council (WGC), in March 2010, predicted that Chinese gold demand would double by 2020. “We now believe this doubling may, in fact, be achieved far sooner,” Albert Cheng, WGC Far East Managing Director, said.

Years ago, the Chinese were prohibited to buy physical gold or else be imprisoned, until 2002, when government lifted the ban. Since then, federal government created policies and encouraged the people to own the precious yellow metal. In China nowadays, state-owned China Central Television even airs news programs describing how fast and easy it is to buy and sell gold and silver. China further pushed gold towards its citizens, making in within hands’ reach, when it launched the gold vending machines, letting customers easily buy gold coins and bars using cash, debit cards and credit cards.

These developments did not only put a pressure on gold prices, but likewise gave the Chinese currency yuan a bigger role in global trade.

There is currently a new “Renminbi Kilobar Gold” which is the world’s first offshore yuan-denominated spot gold contract. It started trading on the Hong Kong’s Chinese Gold & Silver Exchange in mid-October. It is open to individual Chinese investors and is denominated in something other than Hong Kong dollars.

Spears said that while the contract primarily aims to entice Chinese retail investors, foreign private and institutional investors who prefer yuan-denominated products may consider and also be attracted to it as an alternative reserve currency to the embattled dollar and euro.

“This will increase the yuan’s role in global investment, something China has been working on for years,” Spears said.

“For Westerners who are struggling to come to terms with the notion of a disarrayed dollar, the thought of oil, gold or other commodities being priced in yuan instead of dollars has to seem about as likely as having another country put a man on the moon,” Spears quoted Money Morning Chief InvestmentStrategist Keith Fitz-Gerald in May 2009. “But the Chinese yuan is already well on its way to becoming that globally accepted standard unit of exchange, and the proverbial genie, as they say, is out of the bottle.”

The yuan has appreciated about 3.7 per cent this year against the dollar, but isn’t expected to gain more.

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