- Bloomberg Intelligence suggest gold backed yuan see gold at $64,000 per ounce- “Chinese gold standard would need a rate 50 times bullion’s price”- As China-U.S. relations deteriorate, gold backed yuan possible- Dollar and financial and monetary dominance of U.S. at risk- U.S. and China war of words continues to escalate- China rejects U.S. hegemony in Southeast Asia- Currency war to escalate
If China were to partially back its yuan with gold it would require a gold price of $64,000 per ounce, 50 times bullion’s price today, according to a recent article from respected Bloomberg Intelligence.
It seems like an outlandish forecast. However, as tensions between the U.S. and China continue to escalate such a scenario is not actually as implausible as it may first appear.
If China were to back its yuan with gold it would require a price of $64,000 per ounce according to a recent report from Bloomberg.
While Bloomberg give no details as to how they arrive at this figure, our “back of envelope” calculations would confirm that at its current value relative to the dollar the yuan would indeed require gold – priced in dollars – to be priced in the tens of thousands of dollars.
Chinese M1 money supply is roughly 33.64 trillion yuan which at todays exchange rate equates to around $5.4 trillion.
Bloomberg conservatively estimate China’s gold reserves at around 3150 tonnes although many analysts believe the figure to be much higher.
In order to back $5.4 trillion yuan with 3150 tonnes of gold, the gold price would need to be in the region of $48,600 per ounce.
Bloomberg conclude that, at today’s prices, it would be “basically impossible” for China to fully back its yuan with gold. Indeed, at $1,200 per ounce, it would require over 126,000 tonnes to back $5.4 trillion.
Bloomberg states that “there’s no evidence” that China seeks to adopt a traditional gold standard. However, China’s appetite for gold in recent years has been voracious and it is clear that they and the People’s Bank of China (PBOC) place great strategic importance on the precious metal.
The Chinese have been quite overt in recent months in their ambition to establish the Yuan as a rival reserve currency and it is likely that they intend gold to play a role in that ambition.
If China were to even partially back its currency with gold it would gain further favour across the world as a reliable reserve currency when viewed against the increasingly debased U.S. dollar. In order to maintain some semblance of credibility the U.S. would likely be forced to follow suit.
For the U.S. to back its gargantuan M1 with its stated, and almost certainly grossly overstated, gold reserves of 8,500 tonnes it would push gold prices to multiples of their current price.
There has been a definite heating of tone in the war of words between the U.S. and China in recent months. Only this morning, the Wall Street Journal reports on how details of 4 million federal employees were hacked in April. While the FBI have not directly accused China the WSJ suggests that China is the prime suspect.
At the end of last month a Chinese state-controlled newspaper stated that, if the U.S. continued to interfere with its activities in the South China Sea, war was “inevitable”. China are clearly not intimidated by the prospect of war with the U.S.
China rejects what it sees as U.S. “meddling” in South East Asia. At last years APEC conference, China’s president Xi had President Obama pointedly placed at the peripheries of the stage for the official photograph. President Putin was by his side. The message was subtle but quite clear – China views the U.S. as a peripheral nation in Southeast Asian affairs whereas Russia is at the center.
If tensions continue to escalate – and with that the prospect of a “hot war” as recently warned of by many including George Soros – each side will seek to weaken its rival in a variety of ways. In January, Russia’s Prime Minister Medvedev stated that, if his country were cut out of the SWIFT system, the “Russian response – economically and otherwise – will know no limits.”
In the event of an escalation in economic warfare it seems obvious that the achilles heal of the U.S. is the dollar and its erstwhile global reserve currency status. Many analysts believe that China would be reluctant to sink the dollar given it would undermine the value of their vast holdings of U.S. Treasuries and foreign exchange reserves.
However, there will be a tipping point where the advantage to be gained by badly impacting the dollar and positioning the yuan as new reserve currency will be greater than the disadvantage suffered by a collapse in the value of the dollar.
The tipping point is closer than many believe.
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MARKET UPDATE
Today’s AM LBMA Gold Price was USD 1,175.90, EUR 1,044.25 and GBP 767.82 per ounce.
Yesterday’s AM LBMA Gold Price was USD 1,182.45, EUR 1,041.76 and GBP 766.55 per ounce.
Gold looks on track for its third weekly decline in all major currencies (see charts). Gold fell $8.30 or 0.07 percent yesterday to $1,177.00 an ounce. Silver slid $0.37 or 2.24 percent to $16.18 an ounce.
Gold in USD – 1 Week
Gold in Singapore for immediate delivery was unchanged at $1,176.70 an ounce an ounce near the end of the day, while gold in Switzerland also moved slightly lower. Gold is lower despite market developments that are bullish and ordinarily would have seen gold receive a safe haven bid.
Gold should have seen gains after the IMF warned that the Federal Reserve should delay a rate hike until the first half of 2016 until there are signs of a pickup in wages and inflation, and after Greece did not give in to the Troika and delayed the latest IMF repayment and vowed not to leave the euro.
Gold in Euros – 1 Week
In its annual assessment of the economy, the IMF’s report comes amid signs that some rate setters at the U.S. central bank are also pushing for rate hikes to be delayed until there are clearer signs of a real recovery. U.S. data has been quite poor and the economy shrank 0.7 percent in the first quarter.
“Based on the missions macroeconomic forecast, and barring upside surprises to growth and inflation, this would put lift-off into the first half of 2016,” the fund said.
Greece has delayed its payment of 300 million euros, which was due today. Instead the country said it will bundle all four of its June payments together, with a payment of 1.5 billion euros scheduled for June 30th.
Gold in British Pounds – 1 Week
The Perth Mint said their gold and silver sales fell to a three year low in May, on the stagnant price outlook for precious metals and poor sentiment. From a contrarian perspective this weakness remains bullish and suggests the bottoming process continues.
A key U.S. economic indicator are the nonfarm payrolls number published at 1330 GMT. It is expected to have grown to 225,000 in May from 223,000 in April.
In late European trading gold in dollars is down 0.19 percent at $1,175.51 an ounce. Silver is up 0.04 percent at $16.18 an ounce and platinum is off 0.07% at $1,098.20 an ounce.
