Commodity Trade Mantra

How China will Continue to Gain Influence in the World Gold Market

How China will Continue to Gain Influence in the World Gold Market

How China will Continue to Gain Influence in the World Gold Market

As we’ve been reporting for months, China is quietly becoming a dominant player in the world gold market, as the yellow metal shifts from the West to the East. Now the mainstream media is starting to take notice.

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Not only is China the top consumer of gold in the world, ahead of fellow Asian nation India, it is also gaining stature as a player in the global gold market. Just last week, China launched twice daily gold fixing to establish a regional benchmark that will further bolster the country’s influence.

Earlier this week, NewsMax Finance published an article highlighting five trends in China it says will change the gold market forever. The piece nicely summarizes the trends we’ve been pointing out for more than a year. Based on these trends, NewsMax predicts China will become a dominant force on the world stage:

The gold market will soon be very different than from what we see today—largely due to the current developments in China. China’s influence will impact not just gold investors but everyone who has a vested interest in the global economy, stock markets, and the US dollar. After all, China will be a dominant force in all, as most analysts project.”

Here are the five signs highlighted by NewsMax.

#1 The Chinese Gold Fix

The new Chinese fix will reflect regional market flows and reduce gold’s price dependency on the US dollar. It’s also a sign of China’s growing role as a gold hub:

The program has profound implications as the gold trade continues to move from West to East. It will increase China’s influence over the gold price and expand the yuan’s role as a global currency.”

#2 China’s Participation in Setting the Silver Price

Last fall, China Construction Bank joined the London Bullion Market Associations (LBMA) silver price-setting process. The move gave China direct influence on the price of silver and will work hand-in-hand with the gold fix to elevate Chinese influence in the precious metal markets:

These two moves makes sense, since some of the world’s top gold and silver consumers are in the East—India, Russia, Turkey, and of course China.”

#3 The Yuan’s Inclusion in the IMF Basket

In November, the Yuan earned a spot in the International Monetary Fund’s benchmark currency basket, elevating it to reserve currency status. China began disclosing its official gold reserves last summer as it ramped up its bid for the yuan’s inclusion in the IMF basket. It has steadily increased its hoard ever since. As NewsMax points out, backing the yuan with gold is crucial as China seeks to dominate the world stage:

This means that not only does China need to continue buying gold in massive quantities, it will at some point need to announce it holds a much higher amount. And that announcement will light a fire under the gold price. You may not trust the numbers coming out of Beijing, but keep in mind that China’s biggest goal is to become a first world economy. It wants to be on the same footing as the US, Japan, and Europe. And one way to achieve that is to accumulate a lot more gold.”

#4 Chinese Gold Production Is Slowing

China is not only the top consumer of gold; it also ranks as the top producer of the yellow metal. The country doesn’t export much of that gold. The vast majority stays in the country. With mine production expected to fall over the next several years, China will have to look outward to meet its gold demand:

Bottom line: China’s gold production won’t make it to world markets. Its output is in decline and won’t be available to meet global demand.”

#5 Lack of Other Alternatives for Chinese Investors

With interest rates held at artificially low levels by central bankers, gold is looking more and more attractive to investors. Gold will likely benefit in the future, as Chinese investors find few other good options.

Beijing has made it clear that it will bring rates lower. So what will investors buy? Government debt yields just 1–2%. High-yield corporate debt pays more, but only 15% of Chinese debt is rated by foreign agencies like Moody’s and S&P, so it comes with a lot of potential credit risk. The stock market wiped out many investors, and real estate petered out.”

Taken together, these trends show China will continue to gain influence in the world gold market. The Chinese understand that owning gold means economic power, and they are accumulating both at a rapid rate.

 

 

 

Courtesy: Samuel Bryan

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