Could the Yuan Replace the US Dollar in the Gold Market?
Inclusion in SDR
Gold played a central role in the international monetary system until the collapse of the Bretton Woods framework of fixed exchange rates in 1973. While gold’s role has diminished since then, most central banks continue to hold gold as a certain percentage of their reserves. China kept the world in the dark about how much gold it held as reserves between 2009 until 2015.
Analysts predicted that China had likely tripled the amount of gold held during that timeframe. However, Yi Gang, the central bank’s deputy governor, said in March 2013 that the country could only invest as much as 2% of its foreign exchange holdings in gold.
With the inclusion of the yuan in the IMF (International Monetary Fund) currency basket, the yuan has gained certain significance in the international market. The launch of the yuan fix to gold would likely increase the market sway of China.
Yuan may gain power
The yuan fix has been supported by the four crucial state-owned banks of China including the Industrial and Commercial Bank of China (or ICBC), the Agricultural Bank of China, Bank of China, and the China Construction Bank. If the new gold fix gets more popular, it could add pressure on the century-old London gold fix price. China may thus overpower the gold markets.
With the added support from global partners and the massive gold holdings, China could bring the dead gold standard back to life. A gold standard means that the gold supply would determine the money supply. Thus, monetary policy could no longer be used to stabilize the economy.
However, under the current economic instability and the growing concerns regarding the credibility of the major world currencies, the revival of the gold standard would help the gold-hoarding countries. The increased efforts towards making the yuan more prominent suggest that China would welcome the revival of the gold standard.
The funds that rely heavily on gold include the Sprott Gold Miners (SGDM), the Market Vectors Junior Gold Miners (GDXJ), and the PowerShares DB Gold Fund (DGL).
Browse this series on Market Realist: