Koos Jansen
BullionStar Blogs
Koos Jansen
Posted on 24 Aug 2015 by

Theory On China’s Gold Strategy

Developments at the Chinese central bank (PBOC) hint at more moves towards gold. The most important recent gold developments are; (i) the PBOC updated its official gold reserves from 1,054 tonnes to 1,658 tonnes on 17 July, (ii) the PBOC devalued the renminbi by approximately 3 % on 11 August, (iii) the PBOC again updated its official gold reserves on 15 August, increasing the gold reserves by 19 tonnes to 1,677 tonnes and for the first time values the gold reserves mark-to-market.

So, what are we looking at? Well, on one hand the updates in the official gold reserves are intended to conform to the rules of International Monetary Fund (IMF) for renminbi inclusion into the IMF’s basket of currencies; the Special Drawing Rights (SDR). To be included, the renminbi is required to be freely usable and the PBOC is required to report international reserves according to the IMF’s Special Data Dissemination Standard (SDDS). The IMF disclosed early this year that the renminbi qualified to be freely usable, what was left was openness about the PBOC’s international reserves, which is what the Chinese are working on right now. On the other hand the official gold reserve updates acknowledge that the PBOC has been buying gold all along to diversify its reserve holdings which have mostly been consisting of US dollar denominated debt.

It may look like the next world reserve currency will be the SDR, but the SDR is nothing more than a bouquet of paper money embedded with all the flaws of fiat currency. Perhaps the SDR will not function as the new world reserve currency and China is merely using it to kick start renminbi internationalization.

I’ve written repeatedly on these pages that the Chinese government is stimulating its people to purchase gold for a healthy part of their savings. This government would not encourage its people to buy assets it thinks will be worthless in ten years. Thus, the State Council is positive the (renminbi) price of gold will rise!

In 2002 the Shanghai Gold Exchange (SGE) was erected at the core of the Chinese gold market as a robust physical and derivatives exchange that provides all Chinese citizens with direct access to the gold wholesale market. Then, on 11 August 2015 the PBOC devalued the renminbi (yuan) by 3 %.

Screen Shot 2015-08-17 at 11.39.40 PM
Created with BullionStar Charts.

In the graph above we can see the renminbi depreciation against the US dollar. As the US dollar is the world reserve currency, it is also the internationally recognized unit of account. The devaluation of course also affects the renminbi’s value against all other currencies, gold included. The notable difference between gold and all other currencies is that the Chinese government stimulated its 1.3 billion citizens to save in gold, not in any other currency.

This message from the Chinese State Council is very clear. The Council tells its people to save in gold to survive the global fiat devaluation rodeo. When China devalues the renminbi it will boost export and dress up GDP, while the people’s purchasing power will be unharmed assuming that the people saved in gold. This is what happened to the renminbi gold price on 11 August:

Screen Shot 2015-08-17 at 11.39.23 PM
Created with BullionStar Charts.

A 5 % jump! The (renminbi) price of gold reacted and strengthened by 2 % on top of the 3 % renminbi devaluation. The purchasing power of the Chinese people who had their savings in gold did not suffer from the renminbi devaluation. They could buy 5 % more local goods and services priced in renminbi after the devaluation and the same, if not more, foreign goods and services priced in US dollars as before 11 August. If the renminbi price of local goods and services would rise by 3 % as well, the gold savers would still be better off.

There’s of course also other factors influencing the renminbi price of gold but the above example serves as an illustration of the importance for the Chinese people to hold gold. The core message is significant though: save in gold to protect your purchasing power because the renminbi will be inflated to whatever degree necessary. When you live in renminbi land your government will somewhat to some degree – let’s not pretend these gentlemen are angels – help you not be fooled by the paper game and protect your purchasing power.

The fact that the PBOC keeps adding gold to its reserves and values these reserves mark-to-market, puts them in the same position as the Chinese people. The PBOC owns foreign currency reserves (US dollars, euros, yen, pounds, etc), SDR’s and gold. When all fiat currencies further devalue, the asset of last resort is gold. As PBOC is marking gold to market, a potential hyperinflation in fiat assets coupled with a revaluation in gold will keep their balance sheet intact.

Screen Shot 2015-08-24 at 09.34.42

Chinese authorities have never hidden their preference to shift the international monetary system away from the US dollar. Experience has taught them not to subject the value of reserves to whims of a foreign economy – the current dollar system is unsustainable. China’s problem is, how to get rid of dollars if you own more than a trillion of them? Ironically, the biggest beneficiary of the current strength in the US dollar is China. A strong dollar and weak gold price are perfect to slowly diversify into gold.

The PBOC needs to value gold mark-to-market (MTM) on its balance sheet for when the price of gold makes a reverse and the dollar tumbles; losses in dollars will be compensated by gains in gold. One could say MTM is a logic step prior to a post-dollar monetary system. In addition, valuing gold reserves MTM acknowledges the weakness of all fiat currencies, another hint from the PBOC to the populace – as opposed to Federal Reserve that has its gold booked at a statutory value of $42.22 an ounce.


The Eurozone (created to counter the dollar) and Russia value their gold reserves MTM as well. Maybe a few powerblocks are preparing to pull the plug from the dollar and discontinue its exorbitant privilege? If eventually gold were to replace the US dollar’s status as reserve currency, central banks would be buying and selling gold to manage their respective currencies. Is this policy in the European Central Bank’s mandate? Yes it is.

Article 18

Open market and credit operations

18.1. In order to achieve the objectives of the ESCB and to carry out its tasks, the ECB and the national central banks may:

— operate in the financial markets by buying and selling outright (spot and forward) or under repurchase agreement and by lending or borrowing claims and marketable instruments, whether in euro or other currencies, as well as precious metals;

Article 23

External operations

The ECB and national central banks may:

— acquire and sell spot and forward all types of foreign exchange assets and precious metals; the term ‘foreign exchange asset’ shall include securities and all other assets in the currency of any country or units of account and in whatever form held;

— hold and manage the assets referred to in this Article;

— conduct all types of banking transactions in relations with third countries and international organisations, including borrowing and lending operations.

What a wonderful way for a central bank to fight deflation or inflation, just buy or sell gold. No exorbitant privilege, debt monetization, moral hazard or political disputes. Is this where we’re heading?

Koos Jansen
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  • Frank Knopers

    Good article Koos

  • leksuss

    Thanks for article! Where have you been last 1.5 month?

    • JanNieuwenhuijs

      I have/had some health issues…

      • Au_Nuts

        Koos, I sincerely hope you are on the mend.

        I further hope you’re not being hobbled by TPTB for speaking the truth?

        “Truth is dangerous. It topples palaces and kills kings. It stirs gentle men to rage and bids them take up arms. It wakes old grievances and opens forgotten wounds. It is the mother of the sleepless night and the hag-ridden day. And yet there is one thing that is more dangerous than Truth. Those who would silence Truth’s voice are more destructive by far.

        It is most perilous to be a speaker of Truth. Sometimes one must choose to be silent, or be silenced. But if a truth cannot be spoken, it must at least be known. Even if you dare not speak truth to others, never lie to yourself.”

        Frances Hardinge.

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  • Navigator

    Great article. I miss your regular SGE withdrawal updates. Hope you’re more healthy now.

  • gnarit

    I’m not sure I understand the conclusion… can someone explain with a bit more details?

    • Au_Nuts

      Buy physical gold

    • http://PeterPalms.com/capital peterpalms

      The space provided here is not large enough to anwer your question in full. provide me with a place to send it and I wills

  • http://PeterPalms.com/capital peterpalms

    The conclusion is that The United States government is mired in a 5.8-trillion-dollar debt. By 2001, interest payments on that debt were running $360 billion per year. That consumes about 19% of all federal revenue and costs the average family over $5,000 each year. Nothing is purchased by it. It merely pays interest. It represents the govern­ment’s largest single expense. Interest on the national debt is already consuming more than 36% of all the revenue collected from personal income taxes. If the long-term trend
    continues, there is nothing to prevent it from eventually consuming all of it.

    By 1992, there were more people working for government than for manufacturing
    companies in the private sector. There are more citizens receiving government
    checks than there are paying income taxes. When it is possible for people
    to vote on issues involving the transfer of wealth to themselves from others, the ballot box becomes a weapon whereby the majority plunders the minority. That is the
    point of no return. It is a doomsday mechanism.

    By 1992, more than half of all federal outlays went for what are called entitlements. Here is another doomsday mechanism. Entitlements are expenses—such as Social Security and Medicare—which are based on promises of future payments. Entitlements represent 52% of federal outlays. When this is added to the 14% that is now being spent for interest payments on the national debt, we come to the startling conclusion that two-thirds of all federal expenses are now entirely automatic, and that percentage is growing each month.

    The biggest doomsday mechanism of all is the Federal Reserve System. Every
    cent of our money supply came into being for the purpose of being loaned to someone. Those dollars will disappear when the loans are paid back. If we tried to pay off the national debt, our money supply would be undermined. Under the Federal Reserve System, therefore, Congress would be fearful to eliminate the national debt even if it wanted to.

    Political environmentalism has caused millions of acres of timber and agricultural land to be taken out of production. Heavy industry has been chased from our shores by our own government. High taxes, rules beyond reason for safety devices in the work place, so-called fair-employment practices, and mandatory health insurance are rapidly destroying what is left of the private sector. The result is unemployment and dislocation for millions of Ameri­can workers. Government moves in to fill the void it creates, and
    bureaucracy grows by the hour.

    Federal taxes now take more than 40% of our private incomes. State, county, and local taxes are on top of that. Inflation feeds on what is left. We spend half of each year working for the govern­ment. Real wages in America have declined. Young couples
    with a single income have a lower standard of living than their parents did. The net worth of the average household is falling The amount of leisure time is shrinking. The percentage of Americans who own their homes is dropping. The age at which a family acquires a first home is rising. The number of families counted among the middle class is falling The number of people living below the officially defined poverty
    level is rising. More and more Americans are broke at age 65.

    • gnarit

      Thanks for the details ;).

  • Optimist911

    Aside from the recent devaluation, renminbi is going up now while the dollar sinks, despite that it’s China supposedly slowing down. The dollar is also losing ground against most other big-name currencies, even though it’s America supposedly on the brink of economic liftoff as others shrink or muddle along. To complete the picture, gold is going down as well. Shouldn’t all these things be kinda exactly the opposite of what they are?

    • Helmut Beintner

      …economic liftoff? to bad it can not get of the Ground.

  • Wil Martindale

    Methinks, Koos, that you have just described what some call FREEGOLD. Is this where we’re heading? To quote Another “Everyone knows where we have been. Let’s see where we are going!”

  • helen

    China’s gold reserves in 2009 was 1,054 tonnes and now on August 15, 2015
    the PBOC announced a mere 1,677 tonnes.

    An increase of a mere 623 tonnes over a period of about 6 years!

    The joke is on who really!?

  • Miao ZhiCheng

    Would it be possible that, Chinese central bank set aside gold for the silk road gold fund instead of having them on the balance sheet? Silk Road Gold Fund is going to be around $16B, that’s around 450 thousand tons of gold.

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