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How China Will Shock the Gold Market

One of the freaky things about tsunami waves is they’re barely noticeable out at sea.

In the open ocean, where the depths can hide its raw power, a tsunami is only about a meter high at most. It’s when the tsunami wave finally hits land that it starts to rear up and tower overhead, astonishing and terrifying all who see it.

We’re about to see something like this in the gold market. Courtesy of China.

I’ve told you recently how China is planning to dethrone King Dollar. Right now, those plans are slowly falling into place, just as I said. The country already announced it will unveil the new China International Payment System later this year. That opens the door to making the yuan (or renminbi) a fully convertible trading currency.

In addition, China is pressing the International Monetary Fund (IMF) to make the yuan a fifth world reserve currency. If added, it will join a basket of currencies that IMF member countries can count toward their official reserves. This is currently composed of dollars, euros, yen and British pounds.

But China’s ambitions don’t end there.

China’s Gilded Ambitions

The real goal is to make the yuan THE world reserve currency – replacing the U.S. dollar in all sorts of international transactions. And this tidal wave of change is going to send gold prices surging.

China has many good reasons for doing this. It would lower borrowing costs for Chinese companies, especially those abroad… It would push more central banks to hold yuan, boosting demand… It would speed up financial reforms… It would allow China to set prices for natural resources from oil to iron ore…

And it would especially pave the way for a more multipolar world, boosting China’s prestige as the U.S. goes into decline.

As it stands, the U.S. dollar makes up 63% of world central bank holdings. And data from the Society for Worldwide Interbank Financial Telecommunication shows our currency was used for 43% of global payments in February.

China would love to snag a big piece of that action.

The Mystery of China’s Gold

So how would the yuan becoming a world reserve currency boost gold?

Well, when and if China joins the IMF’s Special Drawing Rights (SDR) basket, it will likely reveal just how much gold it has.

Officially, China has 1,054 metric tons of gold in its reserves. Beijing has kept that figure unchanged since 2009 in the data it reports to the IMF. It probably has much more.

Why would China keep its gold reserves secret? It views Western countries as competitors, and uses that secrecy as a “shield” to protect what it sees as its national interests.

The issue is…

As the IMF considers adding the yuan to its SDR basket, it will need to examine many things. Whether the yuan is freely usable in trade is important. Another necessary piece of data? Just how much gold China has in reserves.

So what if China comes clean? The speculation is that China is holding at least DOUBLE its reported gold reserves… more than 2,000 metric tons. That would still leave it well behind the U.S., which has 8,134 metric tons.

Of course, China could have even more gold than that… a LOT more.

Based on trade data, domestic output and China Gold Association figures, Bloomberg Intelligence reports: “The People’s Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tons.”

If that’s the case, then China is actually in possession of the world’s second-largest gold reserve.

gold holdings by country organization as of march 2015 chart

And there is every indication that China is continually adding to its gold reserves. A whopping 50 metric tons were sold out of the Shanghai Gold Exchange in just the last week. That’s not even the biggest week so far this year. And the jewelry market isn’t accounting for all of it.

Now, maybe Bloomberg is wrong, and China’s central bank ISN’T buying a lot of gold. Or maybe China will tell the IMF only about as much gold as it needs to. But…

If China is stocking up on gold, and it ‘fesses up, then traders will have to give gold a big rethink.

After all…

  • Central banks around the world keep buying gold. This year, they’re expected to add another 400 metric tons to their reserves. Russia, Kazakhstan and others are all big buyers.
  • India’s gold consumers are back. The country’s gold imports doubled in March to 125 metric tons from only 60 metric tons a year before.
  • After a hard year last year – China’s gold jewelry demand dropped 33% – the Chinese seem to be buying a lot of gold jewelry again. And as the population gets wealthier, the World Gold Council predicts consumer demand will grow to at least 1,350 metric tons by 2017.

Consider all this. Now factor in China adding to its gold reserves in a big way. That would make gold one of the most undervalued assets on the planet right now.

When Does the Tsunami Hit the Beach?

The IMF is holding meetings on whether to add the yuan to its basket of world reserve currencies next month and again in October. Since government agencies never hurry about anything, I would bet that any official announcement will wait until October.

Which, incidentally, is when China’s new payment system will make the yuan fully convertible.

Just remember, the Chinese don’t want to spark a panic in the U.S. dollar. They hold a LOT of U.S. dollar assets. So, the shift should be gradual, and slow enough for you to get ahead of it.

Perhaps we’ll see China announce a big boost in its gold holdings this year… and another boost next year… and the year after that… and so on.

On the other hand, you don’t want to dawdle, either. This could be the biggest tidal change we’ll see in the markets for some time.

There are plenty of good precious metals producers that should make the most of this. In fact, I’ve recommended a bunch to my Oxford Resource Explorer subscribers.

And if you prefer an ETF, consider the Sprott Gold Miners ETF (NYSE: SGDM). It has an expense ratio of 0.57%, and it’s stocked with excellent miners. Just remember to do your own due diligence before buying anything.

Good investing,

Sean

P.S. Do you like natural resources? Do you want to know which gold and energy stocks are on the launch pad? Then don’t miss one of the best conferences of the year – the Sprott-Stansberry Vancouver Natural Resource Symposium, July 28-31. I’ll be there, as will Rick Rule, Porter Stansberry and many others. To find out more, click here.


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