As China strives to establish the Renminbi as the dominant currency in global trade, it recognizes the importance of having substantial reserves of gold to support the currency’s strength. Despite a respectable 8% increase in domestic production in the first two months of 2012, China still has a long way to go. The country is aware that a sudden influx of imported gold could cause a significant disturbance in the gold market, and therefore, it is taking a strategic approach to acquiring physical gold.
China’s use of proxies such as Sovereign Wealth Funds to purchase gold discreetly has been successful, but the limits of this approach are becoming apparent. Over the years, China has been actively diversifying its dollar-based assets into tangible assets, a trend that has become so common it goes largely unnoticed.
One principal strategy is the acquisition of gold mines, allowing China to obtain gold at a lower cost and potentially reducing the impact on the gold market. The rising cost of extraction is offset by the increase in gold prices, enabling China to purchase gold for under $700 per ounce last year.
China’s approach to acquiring gold is a testament to its long-term outlook and confidence in the persistent value of gold. While the gold market may eventually catch up to China’s actions, the country’s coup may already be complete by then.
As individuals, we must weigh the benefits of following China’s lead versus remaining steadfast in our belief in the value of the dollar.
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