China Encourages Citizens to Buy Gold, II

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"Is China shunning the USD to make room for gold?"

China is reducing its holdings of USD Treasuries, according to the U.S. Treasury's website. In November 2010, it lent the U.S. $895.6 billion, which was down 3.6% YOY. "China has shortened all [its] maturities to less than five years and now they are not as strong in the auctions," argues EverBank President Chuck Butler. Speculation is bubbling that China is shunning the USD to make room for another asset.

Could it be gold?

Others ridicule the idea. Kitco's Jon Nadler argues that China loves growth too much to switch to a gold standard. If China supports its currency with gold, it'll be forced to limit the amount of money in circulation, which could hurt the economy.

Putting the yuan onto a gold standard may not be the intended outcome; we would suggest it might be to absorb excess liquidity in the economy, thus reducing inflationary pressures. The rate of growth has been so rapid by the stimulus measures introduced by Beijing in the financial crisis aftermath has largely wound down, which has brought price inflation with it. Raising interest rates and bank reserve requirements has the desired effect of slowing demand, but at the additional cost of raising industry costs. Giving the population something else to speculate on apart from property prices could be the intent. We don't see how encouraging the public to buy gold furthers the aims of a currency reserve standard—India has been the largest gold importer for many years, most of it bought by the general public, yet the rupee is a long way from the front runners as the next reserve currency.

Whatever Beijing's intent, it has undoubtedly supported the gold price over the last year and that policy is—like so many other metals—likely to impact 2011 gold prices and 2012 even more.

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