Is Stockpiling Gold a Strategy?

Gold, a viable reserve asset

China has 30,000 tons of gold currently held in reserve as part of a plan to situate the yuan as the world’s first currency.

China is gathering gold reserves. Reports of the actual amount are unconfirmed, but there are strong rumours that China has more than 30,000 tons of the yellow stuff stockpiled. Duowei News said recently that “if China does have 30,000 tons, then the yuan will have a very strong shield to protect itself. Even if it is not true, it is clear that China collects gold very actively”.

Although unspoken, it is widely understood to be the mission of People’s Bank of China Governor Zhou Xiaochuan to build the yuan into one of the International Monetary Fund (IMF) reserve currencies. The reserve currencies at the moment are the dollar, the euro, the yen and the British pound. In recent years China has made significant economic reforms that will allow the yuan to be free floating within the next several years.

Gold BuyingAlthough the role of gold has grown smaller since the collapse of fixed exchange rates in 1973, this most prized of precious metals is still of huge psychological and financial importance to the global markets. Central banks in the U.S. and Europe still hold a significant amount of gold as part of their reserves and the IMF still holds 2,814 tons.

As the yuan becomes an increasingly significant currency internationally, it is more likely that China aspires to float a gold-backed alternative to the dollar, the world’s current reserve currency. The world believes it is going to happen, too. Organisation for Economic Cooperation and Development (OECD) analysts’ project that China’s economy will be the biggest in the world by 2016. The OECD also believes the yuan will succeed in becoming the international global reserve currency.

Gold Buying Kept under Wraps

As ETF Daily News pointed out earlier this year, China is not exactly advertising its activity, as “buying surreptitiously allows Beijing to buy bullion at bargain prices; if the world knew how much China was really amassing, a run on gold the likes of which the globe has never seen would likely ensue.”

There was a temporary fall of 7 percent in demand for the yellow metal in China in the first quarter of 2015, due to a slowing economy in combination with a rush stock buy up. However, first-quarter demand in China was still 27% higher than the five year quarterly average growth, confirming the rise in demand for gold as the underlying trend. A recent World Gold Council report said that full year demand in China is expected to be around 900 – 1,000 tons. After all, you need a huge amount of gold to challenge a global superpower on the scale of the U.S.

Impact on the U.S.Gold Portfolio

The highly regarded U.S. financial analyst and investment broker Peter Schiff said recently that the results of the yuan unpegging would be a “10.0 on the Richter scale of economic activity” in the U.S. If China’s yuan topples the dollar as international reserve currency, it will have a radical impact on the balance of power in the world.

For the moment, the U.S. dollar is still the top reserve currency. The IMF reports that 63 percent of world central bank holdings are still in dollars, while the second most popular is the euro, with 22%. China is currently the seventh, so it still has a way to go.

China is not the only country to be collecting gold with a passion – Russia has also gold reserves that are triple the size they were in 2005. It’s a strategy designed to strengthen power and destabilise the U.S. dollar, after all, ‘he who has the gold, has the power’.

In these times of global uncertainty, it’s a good conservative move to build the proportion of gold in your portfolio.