September 08, 2009

Will China Switch to a Gold Standard?

A swirl of pitches from "gold bugs" and currency commenters say China is buying gold and so should you. The excited headlines are based on various remarks by former and current Chinese government officials on Beijing's concern over the health of the almighty (US) dollar. Many of the remarks most often cited were said over the past year and some date back several years.

It is true Beijing is buying gold from domestic production, slowly, and some say secretly - initially off the official statements of the People's Bank of China. But the amount of gold held is a tiny fraction of the $2.13 trillion (as of 6/30/2009) foreign exchange reserves Beijing holds.

Will China switch to a gold standard? That question has tantalized speculators on and off throughout history. Little more than a century ago, Beijing's decision to not follow the USA and Japan with a gold standard may have contributed to the collapse of the Chinese currency (based on a silver standard) by the 1940s.

One thing stands out - talk of internationalizing Renminbi is everywhere. Henry Kissinger predicted on Bloomberg TV just a few weeks ago that an alternative international currency will probably emerge based around the Yuan. Investment guru "Dr. Doom" Marc Faber once predicted that the world's finances would become based on the dollar, euro, Yen, Yuan, and gold.....

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