The Chinese government is encouraging investments in gold and is working to expand the range of gold investments there. But the U.S. and others believe that the Yuan is going to appreciate. Surely the Chinese investor will be hurt if this happens?
Chinese Gold Promotion
The Chinese government has been adding to its gold reserves, for at least six years now, we believe. Local gold production is not leaving the country, nor will it for years to come. At the same time the Chinese government favors the development of new gold investment products, has opened up gold markets and encouraged the major Chinese banks to sell gold across China.
This is a particularly important development for the global gold market in the light of the fact that per capita, the Chinese hold the least amount of gold amongst the Asian nations. The savings propensity of the average Chinese earner is remarkable, for they save around 40% of their disposable income. To date these have been held on deposit at the banks, with the more sophisticated venturing into the equity markets there. But these in times of volatile 'spikes' can behave more like gambling casinos than investment sources. Gold in the Chinese mind represents true value and leads to financial security. Consequently, the potential for gold buying in this nation of 1.4 billion people who are in a rapid process of financial empowerment is tremendous and could well, in time make China one of if not the most important investment markets for gold.
The main restraint on Chinese gold buying, whether by individuals or the government, is the small size of the global gold market. Persistent long-term buying is the only way the acquisition of large quantities of gold can be approached. Higher prices over time may well flush out sellers of gold. So we expect Chinese gold buying to remain persistent for the foreseeable future.
Will The Yuan Appreciate as the U.S. wants?
For years now the U.S. in particular has been calling for an appreciation in the Yuan. Even the I.M.F. has told them that it is in the interests of China to let the Yuan appreciate. But no heed has been taken of such demands. Yes, the inscrutable Chinese have allowed the West to get the impression that they may well let the Yuan appreciate, but a look at the advantages to China of a pegged Yuan to the $ tell us the story.
The original reason for the pegging of the Yuan to the U.S. $ was to capture the price advantage Chinese good had over the equivalent made everywhere else. As the $ is the global reserve currency, such prices were easily translated into other currencies. As we see by yesterday's export report for May from China the rise of 48% shows what advantages such pegging and pricing brings as the world slowly recovers. Yes import could be cheaper, but that would only save money not promote industry. After all China wants and needs to develop its economy.
We have been touting the future role of the Yuan as a global reserve currency for well over the last two years now. Since then we have seen the tentative steps that the Chinese need to take to ensure their banks can cope with this changed structure. Since expanding Yuan trade in just Hong Kong, it is now spread throughout the main manufacturing hub of Southern China. When they are ready, we do expect to see a flood of Yuan to all their international trading partners, to pay for imports and then to make Yuan available to pay for Chinese exports. As Chinese trade is already global, there will be a point when Chinese importers will price imports and exports in the Yuan. While this process is in transition, we also expect their pricing policies to widen to include allowing payment for Chinese exports in the broad spectrum of global currencies. This will allow China to diversify its reserves and lower its exposure to just the $ or the €.
When the internationalization of the Yuan happens there would normally be a tremendous fall in the value of the Yuan as it floods markets, but in today's context that fall would be absorbed by the pressure for the Yuan that is now being experienced. When it does happen, we believe that China will want the Yuan to either hold current levels of in fact fall.
The Gold Price in the Yuan
Having said all the above, we have to ask you if you expect the Chinese government to promote gold so strongly to its citizens, then knowingly engineer a fall in the Yuan price of gold? Our view is that the Chinese government would not wish to hurt its own like that, but with a large dose of forethought, would have blended to two policies to the benefit of its own citizens. If they didn't what would happen to Chinese gold demand.
Where will the price of gold head to in the Yuan?
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There is no doubt in our minds that the low percentage of gold held by China is being combated by 'Official' buying in the open market and by the retention of locally produced gold in China. In support of this, is the government's encouragement to local citizens to buy gold for their own account. One day, should the need arise the government can confiscate that gold in the national interest [heard that before?].
But more importantly, as has not been realized by the financial community yet, an appreciating gold price widens the gold market, per se. A gold price of around $36,000 equals the debt of the U.S.A. To explain this, please note that in extreme times the price of gold is divorced from local currencies and is used in international trade in place of currencies. This is a fact validated by history itself. It is therefore in the interests of all nations, particularly rising powers [who will change the balance of power and wealth] to accumulate as much gold as it can. This rules out price considerations and makes five figure gold prices tenable.
