China May Announce Its Gold Reserves Are 2nd Largest in World
According to Bloomberg Intelligence, China’s gold bullion reserves may have tripled since its last official report in 2009. Bloomberg estimates that the People’s Bank of China could now own as much as 3,510 metric tons of the metal. If true, China now has the second largest store of gold in the world, following the United States with 8,133 tons.
While there has been a lot of speculation in the past few years that the Chinese government has been stockpiling more gold, this is the first mainstream American news source that we have seen seriously look into the possibility. Bloomberg reached its estimate by analyzing China Gold Association data, as well as domestic production and trade figures.
Why this sudden attention to China’s gold hoard? The International Monetary Fund will be re-examining the composition of its Special Drawing Right (SDR) currency basket this year. Every five years the IMF reviews the SDR to ensure its holdings reflect the relative importance of world currencies. It is currently composed of dollars, euros, yens, and British pounds.
China wants its yuan added to this basket of currencies, and it has a strong case to make. In January, we learned that the Chinese yuan became one of the top five payment currencies in the world in late 2014. On top of that, China also surpassed the US as the world’s largest economy when measured in economic output.
However, to get the yuan added to the SDR, China needs to prove its currency is not only central to the global economy, but also stable. That’s where gold comes in. Gold is one of the most widely-accepted assets for diversifying and stabilizing a portfolio, whether it be the foreign-exchange reserves of a large country or the holdings of a savvy investor.As Bart Melek of TD Securities told Bloomberg:
If you want to set yourself up as a reserve currency, you may want to have assets on your balance sheet other than other fiat currencies… [Gold is] certainly viewed as a viable store of value for an up-and-coming global power.”
A sudden revelation that China’s gold holdings had tripled in the last six years could add significant support to the price of gold. It may even catalyze a dramatic upward move.
To better understand the role of SDRs in the global economy, watch this short video from the IMF. It’s easy to see how the yuan could become an even more essential currency in international trade practically overnight.
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