Chinese govt advise gold buying - why? What is their plan?

flaskofcoffee | October 05, 2009 | 251 likes, 4 dislikes
http://www.businessinsider.com/might-...




Let's face it, why else would a govt want its people to save in gold?
The Chinese govt have been advising the people of China to buy gold, even going so far as to produce television programmes explaining the benefits and logistics of doing so.

As we know from experience, the ability to print paper, and credit, money by fiat is a privilege held dear by governments - not something they wish, or can generally afford, to let go of.

The Chinese govt are not, generally, renowned for kindness to their population so there MUST be a payoff perceived by China for the future.

I wonder if the Chinese govt are going to, at some point, allow minting of gold into high-value coins denominated in their currency.

There is a precedent in coins sasuch as the Panda Gold Coin. This one, from 1982 I think, has a face value of 500 yuan, which is around $73. A person who bought it at face value, when 1 oz of gold was only around 500 yuan, still has the nominal 500 yuan secured in the coin's legal tender... but the 1 oz of gold is now worth close to 8,000 yuan!

Heads you hold your nominal value... tails you make a packet if gold goes up.

Anyway, a massive conversion of citizen's gold to legal tender would create a solid pm-backing for their currency financed by the savings of the population.

It might also give them a real shot at taking the prize of reserve currency status from the dollar as it would increase the money supply - the liquidity available to handle demand for reserve currency - without debasing the currency. Converting investment gold to a legal tender coin does not debase the value of existing currency - the value is simply transferred from the commodity, gold.

If Mr Li in China buys 1 oz of gold and then the gold is converted into a legal tender coin worth 8,000 Chinese yuan there is extra (yuan) money introduced into the system yet no effect on inflation. Sounds bizarre, but take a look.....

Someone owns 8,000 yuan, someone else owns 1oz of gold, worth 8,000 yuan. In this scenario, the gold is worth 8,000 yuan but remains just a commodity. Mint it into a legal tender coin and the money supply is doubled - there are 16,000 yuan in circulation yet no-one has lost out through inflation as the total value on international markets remains the same as 8,000 yuan plus 1 oz of gold.

This a is how the Chinese might have a crack at creating enough, money - backed by gold, and without debasing the currency - to service the needs of the international market for oil and goods currently traded in dollars. Massive liquidity is one aspect of the dollar which keeps it in first place for reserve currency status - no other currency can supply the required amount of currency whilst still maintaining some trust, not yet, anyway.

And the whole exercise would have been financed entirely by the Chinese citizenship, slowly and without fuss,so no need for the government to announce its plan or be forced to pay through the nose for masses of gold to back its own plan.

Let's face it, why else would a govt want its people to save in gold? Can anyone give a good reason other than something like my own?

Simple question - would the above make the Chinese currency stronger or weaker? I say stronger.

Aha, say my detractors, but the Chinese need the West to buy their goods cheap. A strong currency hurts exports.

Yes, but what if the Chinese have already decided that that the U.S. et all are basket cases and that demand from them is not going to return. What if they are intent on creating domestic strength in buying power to replace the U.S.? To hell with producing plastic ducks for kids in Conneticut, stimulate domestic demand and enterprise (there are billions of potential consumers in China, if only they had some buying power.

I suggest that the theory of China encouraging a massive savings base in gold to later convert into legal tender would work..... and draw MASSIVE cash inflows to the currency from around the crumbling world. This would enrich the country's buying power, and people, allowing them to transition from low-earning producers for the West, to consumers able to buy goods on the international and domestic markets with a strong currency.

I can't guarantee to be right... but one certainly has to look for an explanation as to why China is a friend of gold, whilst the Fed and others seem to have a deep-rooted fear and loathing of the stuff. The flawed, some might say failed, experience of fiat currencies backed by nothing will certainly not have gone unnoticed by the Chinese - and they might just be eyeing the prize of reserve currency status for the future.

http://www.dnaindia.com/money/column_...