How China is Partially Driving Gold’s Recent Surge

Over the last three to four months, gold has had its biggest consecutive monthly surge in over two years.

Interestingly, China’s gold reserves also saw its largest increase in over two years.

According to the People’s Bank of China, the country’s gold reserves suddenly jumped by 320,000 troy ounces by the end of December 2018.

Source: Zerohedge

And China’s not the only country buying gold. According to a Bloomberg report, it turns out that Hungary and Poland have also increased their holding for the first time in several years.

Clearly, this can be a bullish sign for gold. But it also makes you stop and think as to what their motivations might be.

Might these countries be looking to diversify? Or, might they be trying to move away from the US dollar?

China has been very secretive about its gold accumulations, as you can see in the chart. For instance, take a look at 2015, when China’s holding jumped by 57%.

The country had been quietly accumulating gold over a period of six years, announcing their reserve increase at the end of the accumulation phase.

What makes China’s latest move important is not the increase itself but the timing of the announcement. Why did they decide to publicly announce it now?

For months, the yuan has achieved relative stability against gold, but then China suddenly allowed gold to surge against their domestic currency.

Some financial experts, like Alasdair Macleod (celebrated member of the London Stock Exchange), think that China is slowly trying replace dollar with a gold-backed yuan for international trade.

He just might have a point:

“It is hard to see how the US can match a sound-money plan from China.

Furthermore, the US Government’s finances are already in very poor shape and a return to sound money would require a reduction in government spending that all observers can agree is politically impossible.

This is not a problem the Chinese government faces, and the purpose of a gold-linked jumbo bond is not so much to raise funds; rather it is to seal a price relationship between the yuan and gold.

Whether China implements the plan...or not, one thing is for sure: the next credit crisis will happen, and it will have a major impact on all nations operating with fiat money systems.

The interest rate question, because of the mountains of debt owed by governments and consumers, will have to be addressed, with nearly all Western economies irretrievably ensnared in a debt trap. The hurdles faced in moving to a sound monetary policy appear to be simply too daunting to be addressed.

Ultimately, a return to sound money is a solution that will do less damage than fiat currencies losing their purchasing power at an accelerating pace.

Think Venezuela, and how sound money would solve her problems. But that path is blocked by a sink-hole that threatens to swallow up whole governments.

Trying to buy time by throwing yet more money at an economy suffering a credit crisis will only destroy the currency.

The tactic worked during the Lehman crisis, but it was a close-run thing. It is unlikely to work again.

...China’s economy has had its debt expansion of the last ten years mostly aimed at production, if she fails to act soon she faces an old-fashioned slump with industries going bust and unemployment rocketing. China offers very limited welfare, and without Maoist-style suppression, faces the prospect of not only the state’s plans going awry, but discontent and rebellion developing among the masses.

For China, a gold-exchange yuan standard is now the only way out. She will also need to firmly deny what Western universities have been teaching her brightest students.

...If she acts early and decisively, China will be the one left standing when the dust settles…

...the rest of us in our fiat-financed welfare states will left chewing the dirt of our unsound currencies.”

Gold, the ultimate form of “sound money,” had been driven out of the US monetary system in 1971.

China aims to get it back, gold’s intrinsic value backing the yuan, potentially transforming the Chinese currency into a more reliable form of money for international trade.

Could China’s latest gold maneuver serve as an explicit warning that the end of the US dollar is near?

It seems as if the only thing immune to China’s potential gold-backed currency assault is the yellow metal itself.