"Enter The Dragon" Starring … Gold

Aibek Burabayev - INO.com Contributor - Metals


Last Monday, the International Monetary Fund (IMF) endorsed the inclusion of the yuan in the fund's Special Drawing Rights (SDR) basket effective on Oct. 1, 2016. The Chinese currency has now joined the elite global currency club and will be the fifth member alongside the US dollar, the euro, the sterling and the Japanese yen.

Beijing has long hoped that the renminbi (another name for Chinese currency) would enter the privileged short list of world currencies, and it finally succeeded last week. But, first and foremost they are celebrating a political victory.

Some experts doubted that the yuan could be judged as "freely usable," which is the main criteria for inclusion to the SDR, but the reality proves that the stronger one is right despite such obvious contradictions as tight currency control and shares sale ban.

I think the main factor for approval is the status of the "World's main trade partner" - China and growing usage of the renmimbi in global trading. In September 2015, the yuan held its position as the fifth most active currency for global payments by value and accounted for 2.45% of global payments with a record 2.79% in August, when it overtook the Japanese yen to rank fourth.

To give you the full picture, the dollar, the euro and the sterling remained the top three currencies for global payments in September, with shares of 43%, 29%, and 9 %, respectively, according to the Society for Worldwide Interbank Financial Telecommunications (SWIFT). There is no doubt that Chinese currency will secure its ranking in coming months, but to reach the British pound it needs to attract much more interest, and the recent IMF move could facilitate that.

Primary weapon

In July of this year, China declassified it's gold holdings data for the first time in 6 years. It was a step towards financial transparency and an attempt to attract more demand for its currency. And there is much for China to boast about as it's gold reserves surged 57% or 600 metric tons since 2009 and the country ranked fifth in the world overtaking Russia.

The Chinese central bank added about 21 metric tons of gold to it's reserves in November, the most in 5 months. Back in June of this year, I shared with you a statistical analysis of the central banks' huge buying activity in the gold market amid a lack of demand from the rest of the market participants.

The Chinese and Russian central banks are the most active buyers of gold due to their eagerness to diversify their huge foreign reserve holdings with the largest part denominated in the US dollar. Indeed, China is speeding up its way to dollar independence, the share of gold in foreign reserves almost doubled since May, but the percentage figure is still bare at 1.6% in November.


The Unites States is still the indisputable "banker of the world", keeping its fingers on the trigger of global financial stability. This comparatively young nation has managed to benefit from the post-World war industrial breakthroughs and has been playing a leading role for 50 years, despite a decades long prophecy of the "dawn of an Empire".

China ranks first by GDP derived from purchasing power parity; The US is second, and yet, Chinese leaders have much to do with demand for yuan and its global penetration in trade operations. They are looking to undermine the dollar's hegemony in the world.

The Heavenly Empire of China is an ancient though wise nation, which has witnessed a lot, including declines of famous civilizations with century planning strategy. Now it aims at utilizing the advantages the of current industrial superpower. It is famous for its modern "silent" expansion; Africa is the best example as it was conquered by China without firing a shot.

I think we are going to observe the organization of an earlier predicted new multi-polar world with a rebalancing of power in favor of the new strong players like China. Gold, again, as many times before plays its key role as a primary weapon in taking the place in the sun. Gold bugs should pray for the "Dragon" country, which saves metal from sinking, buying it up at price drops and accumulating more and more gold.

Another interesting thing for me is whether China would use the same financial model as the US, flooding the world with fiat Yuan and exchange it for valuable resources and assets. Or it will choose its own way, for instance, backing the Yuan with Gold to destroy the credibility of other fiat currencies, why not? Let's live and see!

Intelligent trades!

Aibek Burabayev
INO.com Contributor, Metals

Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.