In a world filled with fiat currencies, how important is gold’s role in the financial system? Proponents often view the precious metal as a hedge against economic chaos, while critics typically claim gold is hardly more than an unproductive rock. Interestingly, some countries appear to believe gold is quite important, and one former Fed chair explains why.
Alan Greenspan, who served at the helm of the Federal Reserve for nearly two decades, recently penned an op-ed for the Council on Foreign Relations discussing gold and its possible role in China, the world’s second-largest economy. He notes that if China converted only a “relatively modest part of its $4 trillion foreign exchange reserves into gold, the country’s currency could take on unexpected strength in today’s international financial system.”
Greenspan also believes the downside risks for China stockpiling gold are limited, at least from a pure investment point of view. “It would be a gamble, of course, for China to use part of its reserves to buy enough gold bullion to displace the United States from its position as the world’s largest holder of monetary gold,” he wrote. “But the penalty for being wrong, in terms of lost interest and the cost of storage, would be modest.”
The People’s Bank of China has not formally disclosed any changes to its gold holdings in years, but it’s believed that the central bank is purchasing gold to diversify its reserve holdings. In 2009, China announced that it boosted its gold reserves by 454 tonnes via acquiring gold quietly over the previous five years. That represented an impressive 76 percent increase in gold reserves. Today, China still shows that it holds 1,054.1 tonnes in reserves, but it’s speculated by analysts to actually have around 2,000 to 3,000 tonnes.
Some market participants also believe China is building up its gold reserves to challenge the U.S. dollar, which is currently the world’s reserve currency. A few years ago, China’s official news agency, Xinhua, said, “International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.”
Gold already plays a significant role in China’s economy. In 2013, China’s gold consumption surged 41 percent year-over-year to 1,176.40 tonnes, exceeding 1,000 tonnes for the first time on record, according to the China Gold Association. Demand for jewelry was the biggest contributor, with an increase of 43 percent to 716.50 tonnes, while bullion demand rose 57 percent to 375.73 tonnes. China is the largest gold consumer and producer in the world.
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