China’s gold policy coming to a head

42-years ago, the PBOC was appointed with sole responsibility for managing China’s gold. China is now planning a gold exchange standard for the yuan as a trading currency.

So far, China’s gold policy has been tightly controlled, with the price rising in recent years to broadly reflect the decline in the dollar’s true purchasing power. With investors globally now threatening a new rush into the best performing asset over the last six months (up 16.57% v. S&P down 7%), based on its own momentum gold is likely to outperform its value input from a falling dollar.

We assume that it is only investors in western capital market latching onto the gold bull. But it’s also true of the bulk of Chinese households with annual savings of the equivalent of $2.5 trillion burning holes in their pockets. While we may think of them as being ahead of western investors, they are not. Like their western counterparts, they are only just starting to invest in gold.

The impact will be profound. How gold behaves in the coming months will impact on China’s longstanding plans to secure the independence of the yuan from the dollar: a dollar now doomed to follow every other fiat currency in history towards oblivion. The Chinese government will have some interesting decisions to take, and the matter is becoming urgent.