Is China Stockpiling Gold to Unpeg from the Dollar?

Bloomberg hosted ANZ Chief Economist Warren Hogan to discuss Asian demand for gold. Hogan co-authored a new study showing that gold demand in Asia is poised to rise substantially. As supply constraints lift and incomes in the East rise, consumers in countries like China and India will continue to buy record amounts of gold. More importantly, Hogan believes that China may be stockpiling gold as part of a maneuver to un-peg their currency from the dollar.

The first thing we need to understand is that we don’t actually get regular reporting on how much gold the PBOC holds. At last count, a few years ago, it was about a thousand tons. We will be due to get an update in the next year or so. China’s clearly got a gold strategy as a broad view… Whether or not it’s the central bank that is buying the gold or it’s in the broader community is not necessarily clear. But the reality is the renminbi moves towards floating and is a major global currency.”

Peter Schiff talked about this possibility back in January when the Swiss franc unpegged from the euro. When the stronger Swiss franc abandoned the euro, its value soared and the euro plunged. Peter said that an unpegging of the yuan would be a “10.0 on the richter scale of economic activity” for the United States. Peter said:

In the case of China and America, you have poor people in China subsidizing the American middle class. How long can this go on? How many more dollars are the Chinese going to buy, before they give up just like the Swiss? Before they surrender? When you surrender in a currency war, your people are victorious. They win. You never want to win a currency war. You want to lose. Unfortunately, a currency war is the war the Americans are going to win to our own detriment.

Now, when China does this, I don’t know if they’re going to float the Hong Kong dollar separately from the yuan, or maybe peg the Hong Kong dollar to the yuan and then float the yuan. But I think what the catalyst is going to be is QE4.”

As Hogan points out, the yuan is becoming an increasingly strong and important international currency. If China could offer a gold-backed alternative someday, it could be curtains for what is now the world’s reserve currency.

The upside to this scenario? Gold would return to the world stage as a monetary metal, which means now is an excellent opportunity for investment in the precious metal. Hogan believes that any short-term downside of gold is minimal, and expects gold to rise significantly as China expands its gold strategy.

Highlights from Hogan’s remarks:

“The report basically outlines the way Asia is having a tremendous impact on the gold market. If the rise of Asia continues, the transformation of the Asian financial system continues, then the demand for gold will go up substantially. There are supply constraints, but over time there will be a significant lift in gold from investors, from those wanting to buy gold for jewelry purposes as incomes rise in places like India and China and the Mekong region and so forth, also, importantly, from central banks looking to open up their capital accounts. They will need to hold more gold in their foreign exchange reserves. Gold is supply constrained, and that demand lift will result in much higher prices, in our view…

“A big part of the report is arguing that gold is a very important investment class going forward. In a world where defensive assets are increasingly important for investors, but interest rates on those classic defensive assets like government bonds are very low, and there’s also concerns over government debt, gold is a viable alternative as a defensive asset. We think that investors will be looking to buy more gold in the future as well…

“The first thing we need to understand is that we don’t actually get regular reporting on how much gold the PBOC holds. At last count, a few years ago, it was about a thousand tons. We will be due to get an update in the next year or so. China’s clearly got a gold strategy as a broad view. They’re trying to import gold and banks have licenses to bring it in. The Shanghai Gold Exchange is developing rapidly. Whether or not it’s the central bank that is buying the gold or it’s in the broader community is not necessarily clear. But the reality is the renminbi moves towards floating and is a major global currency. You only have to look at the US dollar. The biggest single individual holding of gold in the world is by the US Federal Reserve on behalf of the US government. That’s 8,133 tons held at Fort Knox in Kentucky. They, of course, are the world’s reserve currency. There must be some desire in certain circles, I believe, in China to increase the amount of gold the central bank holds as it moves towards a floating currency over the next 5 to 10 years…

“We think the downside of gold over the next five years is pretty minimal. We’re right on the cost curve, as we’re seeing in many commodity markets, and the supply will be knocked out, and then of course we think the risks are heavily skewed to the upside… This long-term view is very much putting it in perspective that we think long-term investors, such as central banks, or large portfolio investors, should use this as an opportunity to accumulate gold on a longer view…”

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