Gold price needs to be 50x higher for gold backing Chinese yuan

If China wants to back its currency with gold, the Gold price almost fifty times higher than it is now, at $64,000 per troy ounce. That writes Bloomberg based on our own research. For a traditional gold standard, in which all money is backed by gold, there is absolutely insufficient gold in the world at the current gold rate. In that case, China would need 525,000 tons of gold, three times the amount of gold that has been unearthed and collected worldwide over the years.

With a revaluation of gold, a hedge is possible, because Bloomberg calculated that China would be able to hedge in the event of a Gold price of $64,000 per troy ounce is enough for 10,000 tons of gold. That is an achievable goal, considering that China has imported a few thousand tons of gold in recent years. Also, China's gold mining sector has developed into the largest in the world in less than a decade.

Gold-backed yuan

According to Bloomberg, China can attract more foreign capital with a gold-backed yuan. There has been speculation for some time about what China is planning to do with all that gold. However, much of the gold does not end up with the central bank, but with households that Buy gold as an investment or as a form of savings.

If the central bank wanted to back its currency with gold, it would have to buy all that gold from its own people. We don't think that's likely. With a gold reserve of 1,054.1 tonnes, the Chinese central bank ranks sixth among countries with the largest gold reserves, but this figure has not been updated for a number of years.

Gold undervalued?

Until 1971, gold was still the anchor of the global monetary system, but since then the precious metal no longer fulfills an official function in the monetary system. Still, it certainly hasn't lost its luster. After all, since the outbreak of the financial crisis, central banks have been adding gold to their reserves again. But due to gold's relatively low valuation, central banks can only hold a fraction of their reserves in the precious metal.

In March 2013, Yi Gang, governor of the Chinese central bank, said that they could only hold 2% of their total reserves in gold, because the gold market was simply too small. With a revaluation of gold to a price that is a factor of fifty higher, it is suddenly possible for central banks to hold a large part of the reserves in physical gold.

China can force a revaluation by buying physical gold at a multiple of the current gold rate. In this way, it not only devalues its own currency, but also that of other countries against gold. 

"We're probably going to get something that's very different from an old gold standard. It's not going to be a traditional system where you walk into a bank and you come out with a troy ounce of gold. It will be something different and something new", according to Kenneth Hoffman of Bloomberg's metals and mining research division.

Gold price needs to be 50x higher for gold backing Chinese yuan