Is China’s Long-Term Strategy Focused on a New Gold Standard?

Those who buy gold and invest in the yellow metal have increasingly taken note of the gold-buying practices of China and its long-term intentions for the commodity. However, it is important to put the current activities in a historical context before attempting any real analysis of those future actions.

From Mao to Adam Smith to Mao

While supposedly retaining their commitment to the Communist teachings of Chairman Mao, the ruling government of China has proven particularly adept at adopting and adapting the free market principles of Adam Smith’s The Wealth of Nations. It is vital to understanding the Chinese approach to markets to grasp their strategic mindset. Instead of narrowly looking at quarterly profits, these nation builders have shown a willingness to play for the end game with an extended horizon.

Nowhere is this more evident than in their gold plays. In fact, it is now being appreciated by many that as early as 1983 China enacted gold regulations that have served to shape world gold markets. Those regulations were (coincidentally?) put in place just at the beginning of a bear market in Western markets. ¹ This downturn was accentuated by most Western depositories reducing client holdings steadily over the following 15 years. Swiss private bankers were consistently on the seller’s side as they reduced those holdings to historic lows.

This activity resulted in the movement of more than $3 trillion in today’s prices of gold bullion to Asian and Middle Eastern buyers of gold, history’s biggest shift in the shortest period of time. Many now see this as an early indication that these buyers were not so sold as Western governments on the virtues of an economies based solely on paper money and government fiat.

Proactive Planning for U.S. Dollar Alternatives

This view has turned to out and out skepticism by China as Western governments continue to run their currency presses 24/7 and use monetary policies such as quantitative easing while running up massive debts. This is especially the case when that debt is backed by dwindling gold reserves.

As noted by Nathan Lewis in a recent Forbes article, China’s actions are admittedly “the culmination of a two-year plan to move away from a U.S.-centric monetary system.” ² The Chinese have long considered the London and U.S. markets as artificial barriers to a world gold standard, trading paper backed only by more paper. It is worth noting the Shanghai Gold Exchange deals in trades that always result in immediate physical delivery of bullion to gold buyers and investors.

This attitude was expressed clearly as early as March of 2009 by Dr. Zhou Xiaochuan, the governor of China’s central bank. He wrote, “…as the ongoing financial crisis demonstrates, (the question of a global standard not based on gold) is far from being solved, and has become even more severe due to the inherent weaknesses of the current international monetary system.”

China continues to move strategically and tactically on economic, military and political fronts to exert its power on a more global basis. As they do so, it is evident they are more willing to literally bank on the security they see in gold. ³ Moreover, as they work to move from the dollar-centric markets and structures, they position themselves to argue more forcefully for – and to eventually demand – a return to a gold standard, for which they are well prepared to dominate.

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