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LAWRIE WILLIAMS: Is China trying to stabilize the gold price?

It has been noticeable in the past few trading days that the overnight gold price benchmarks set on the Shanghai Gold Exchange (SGE) have been tending to set the metal price higher than the New York close.  This has resulted in a stronger opening in Europe, with the price being gradually brought down in London and New York throughout the day, leaving gold little changed overall.  But is this a sign that the Chinese are beginning to play the gold card to try at least to stabilize the price, and if so could they then start to push it up as and when it suits them?

The SGE is a division of the People’s Bank of China (PBoC) – the Chinese central bank- which is not an autonomous unit like some western central banks purportedly are, but part of the Chinese government’s machine, so it is not unreasonable to suggest that there may be a degree of influence being exerted on the SGE gold price benchmark levels, as is the nature of Chinese government tactics in many areas.  China is the world’s largest gold producer with an annual output of around 450 tonnes and the fifth largest national holder of gold in its reserves, although many analysts and China-followers believe its total gold holdings are far higher than the levels it reports to the IMF on a monthly basis.  It also has been successfully encouraging many of its citizens to buy gold as an investment for some years now (See an article I wrote back in 2009: China pushes silver and gold investment to the masses).  Thus the gold price is important to China both in terms of its national economy, the overall value of its gold and foreign currency reserves and in keeping its middle (spending) classes happy - and consuming – as it seeks to transform its economy from being export-driven to being domestic consumption-driven.

While the SGE benchmark setting arrangement is technically at least as transparent as its London equivalent (which is not saying a great deal), relying on input from a number of commercial banks in setting its twice daily price benchmarks, the vast majority of these banks are Chinese, and thus themselves ultimately state-influenced and controlled.  After all China remains a centrally-planned economy.

With the Chinese yuan set to become an integral part of the IMF’s Special Drawing Right (SDR) in just three weeks’ time, China is becoming increasingly involved in the internationalization of its currency in global trade and as a possible reserve unit.  It thus feels that a strong gold holding and value would enhance its position in achieving this goal.

There are those who believe that the onset of the new SDR including the yuan, and a supposed corresponding downgrading of the US dollar will start a process of dollar devaluation which will ultimately lead to a total dollar collapse and a thus a massive increase in the gold price (in US dollar terms).  There’s little doubt that the U.S. economy does get a boost from its position as the world’s principal reserve currency and its place in global trade, but perhaps the inclusion of the yuan in the SDR will not be the trigger to cause an immediate change in global dollar perception, although it could be the thin end of the wedge.  The IMF would like to enhance the position of the SDR as a world currency, thereby ultimately replacing the dollar as the global reserve unit.  After all the IMF is not mired in trillions of dollars of debt and does not use the printing presses to help balance its books as the U.S. does, so this could be an appealing prospect to countries worried about the long term stability of the dollar.  Certainly China and Russia – the two countries which have been most fervently building their gold reserves - have made no secret that they would like to see the dollar’s global reserve currency role diminished at the very least.

13 Sep 2016 | Categories: Gold, China, Dollar

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