- It used to be that the threat of central bank gold sales would damage market sentiment. Now the threat of significant sales has been met with the threat of significant purchases.
China can back its desire to own gold with plenty of cold hard cash. At nearly $1.4 trillion in dollar-based assets, and almost $2 trillion in total reserves, $80 billion would consume a paltry 6% of China's dollar reserves. At the same time 2,600 tons translates to roughly one-third the U.S. gold reserve.
- By becoming gold's most prominent champion, China mounts an aggressive defense of its domestic gold mining industry.
Few people know that over the last few years China has quietly become the world's leading gold producer. Most of that production never leaves China's borders. There is no question that China has put a floor under long-term gold market expectations. One would have to go back to the first Central Bank Gold Agreement in 1999, which strictly limited the sale and leasing of central bank gold, to find an equivalent organized effort in defense of the long-term price trend.
- By elevating gold to prominence in its national reserves, China lays the groundwork for the yuan's future use as a prominent reserve currency.
In the years to come, China will continue to steadily build its gold reserves through domestic production. It will also attempt to purchase whatever gold it can on the world market through official sector purchases. In the process it will become the fire-breathing dragon in the gold market's living room—ubiquitous and formidable, a presence that cannot be ignored. Few among gold's growing legions would disagree with China's logic, or its now publicly voiced desire to hedge a potentially disastrous collapse of the dollar.