A Chinese Gold Standard?

Source: The Street, Alix Steel (2/17/11)

"China's been buying gold furiously, looking outside country for more."

China consumed 175.2 tons of gold in the fourth quarter of 2010, bringing its grand total for the year to 579.5 tons, or 18.5 million ounces, according to the World Gold Council.

That's a lot of gold. The U.S., in comparison, consumed 233.3 tons in 2010.

It's unknown how much of that gold was consumed by citizens or its central bank, but the question still remains: What will China do with all that gold?

There is a controversial theory percolating in the gold community that China wants the yuan to become the world's reserve currency and is buying gold and silver in order to do it.

The idea is staggering and not to mention fraught with difficulties. China's central bank currently holds 1,054 tons of gold, about 1.8% of its total reserves.

China holds $2.85 trillion in foreign reserves, which means the country would need to buy roughly 66,000 tons of gold to fully back its currency. Even if the country upped the ante to just 3%, it would need to buy 1,000 tons.

Technically, a full gold standard isn't an option. Under the IMF's first amendment to Article IV of Agreement, ratified in 1978, participating countries are not allowed to peg their currency to gold.

But that doesn't mean that China won't try to legitimize its currency by ramping-up its gold holdings. Not only has China been furiously buying gold, but local gold producers have been looking outside the country to find more gold.

China also has been telling its citizens to buy gold, promoting different gold funds, giving investors access to overseas products and launching a global gold contract based in yuan by Chinese Gold and Silver Exchange.

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