China Wants More Say in Gold Prices

Wednesday, 28 May 2014
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Published in Gold Investing
It was a tough week for gold traders, with gold not only holding prices below $1,300 but continuing to slide in mid-week trading. In midday trading on Wednesday, gold was down another $7.34 to $1,257.29, and silver was off a nickel to $19.01.


There are several factors combining to introduce continued volatility to gold prices, including mixed signals on physical demand from India. Investors are also reacting to a strong two-day performance from the stock market, with the S&P 500 holding onto the gains and new record territory in midweek trading.

The sag in gold prices, combined with a surging stock market, has boosted the Dow/Gold ratio to 13.25, far above the historical stability level of 10. Just like last week, I’ll say again that gold seems oversold at these levels. Gold traders also have reason to be hopeful on recent news from China.

If the yuan challenges the dollar as the world’s reserve currency, that’s going to be a landmark moment in history — not one likely to be fondly remembered in the United States.

According to Reuters, China is seeking greater influence over the price of gold in world markets, and China’s central bank gave the Shanghai Gold Exchange (SGE) the green light to launch a global trading platform in the city’s free trade zone. That’s not just asking for greater participation in pricing gold; that’s China taking a shot at the London and New York gold markets. That’s a bold move that will surely rattle gold markets in the days to come. Citing unnamed sources in the article, the SGE plans to offer yuan-denominated physical contracts in various weights, as well as offering contracts for silver, platinum, and palladium at a later date.

On its own, the Chinese move is not particularly surprising. As the world’s largest producer and buyer of gold, it only makes sense the Chinese would want a greater role in setting gold prices. It’s also a reaction to Barclays Plc being fined by regulators for manipulation of the London gold fix. China has organized its own network of cooperating bullion banks in various countries including Australia, New Zealand, and Canada.

While there are logical reasons on the surface for China to be opening its own gold exchange, there are certainly more ominous possibilities swirling just beneath the surface. Various sources have been speculating for some time that China has been taking advantage of lower gold prices to quietly amass the world’s largest stockpile of gold. Obviously the Chinese can’t just go out and announce they’re accumulating gold, especially when gold prices are fixed in foreign markets.

There’s also the looming reality of China taking over as the world’s largest economy, which economists estimate will happen in 2019, but could happen as early as 2016. If the newly-minted largest economy also happened to have the globe’s largest supply of gold, along with a vibrant global market in yuan-denominated physical commodities, that almost sounds like a country making a play to become the world’s reserve currency, doesn't it?

China building a platform to make the yuan the world’s reserve currency, at a time they also take over as the largest economy, is pure speculation on my part — yet all the pieces to do just that are now in plain sight. If the yuan challenges the dollar as the world’s reserve currency, that’s going to become one of the landmark moments in global economic history, and not one likely to be fondly remembered here in the United States. China rising will hit the dollar and US economy like a sledgehammer.

Enjoy the relative quiet in the gold market today, and definitely take advantage of today’s prices. Change is coming — and it’s going to be a wild ride.

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