Chinese Gold Standard Could Look Like This
July 29, 2009
Gold marches up toward $1,000. Gold marches back down again. Today it is $934.
What if this is what China wants?
I have read writers who say that Chinese buying is good for the market and an indication that gold is about to take off. I'll bet you have seen stories like this, too.
Certainly Chinese buying is not an indicator of gold market weakness. That goes without saying.
But is it in the interests of China to push gold to $1,500 or $2,000 a troy ounce when it holds so many U.S. dollars and other foreign currencies?
That would be like throwing half their money away. Why would a Chinese official in his right mind simply bid the price of gold higher and higher on the open market?
It seems to me it would be far better for the Chinese to nibble when gold is weak and stop buying when it temporarily strengthens. Over time its gold reserves will continue to grow and they will do so without disruptions to the market that would cost them a bundle.
When the gold standard held sway in the world, the U.S. Treasury stood ready to buy gold for the official price of $20.67. It also stood ready to sell gold for $20.67 an ounce in the form of freshly minted U.S. coins.
The prices weren't precise. The market assessed what were called points to pay the cost of shipping, insurance and the expenditures associated with handling physical gold.
What if China has decided to behave somewhat in this fashion except the band is not points either side of an official price but simply $1,000 on the high end and $900 on the low end?
It could keep this up for years.
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