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Has The PBOC Taken Control of The Gold "Market"? - Craig Hemke (10/07/2018)

A stack of gold coins behind a gold fine tipped pen

July 10,2018

The evidence is mounting, and we invite you to consider the implications.

First, a few items of background information. Perhaps these are unrelated, perhaps they are not.

Fast forward to the summer of 2018. Two weeks ago, our fellow columnist here at Sprott Money, David Brady, wrote an insightful piece regarding a new correlation for the global gold price—the USDCNY—which is the exchange rate of US$ to Chinese yuan. Though the PBOC maintains a "peg" for this rate, the rate is allowed to fluctuate if the PBOC deems it necessary. Before we go on, I urge you to read David's column: https://www.sprottmoney.com/Blog/gold-the-chinese-...

Now consider this. Since the PBOC began to actively devalue the yuan versus the dollar four weeks ago, the price of COMEX gold has tracked the yuan nearly tick-for tick. This is clearly shown on the chart below. We've taken the USDCNY and inverted it to CNYUSD. This is shown in candlesticks. The price of the Aug18 COMEX gold is represented as a blue line.

However, upon further review, this is not an entirely new phenomenon. Below is the same chart, only extended back for a full twelve months. What do you see here? Does the global gold price appear to be influenced by physical supply and demand? Is it driven by safe haven demand or inflation risk? Or, instead, is the USDCNY exchange rate the principal driving factor of price in 2018?

 

And so, here's where it all gets quite interesting. What are the implications of China assuming control of the global gold price and the existing physical distribution centers in London and New York? Many have long speculated that the Chinese government and the PBOC have stockpiled thousands of metric tonnes of physical gold over the past two decades. It should come as no surprise that the world's largest holder of physical gold would want some measure of control over its price. As David pointed out in his column, "he who owns the gold sets the rules". But to what end would China be driving price?

By linking the dollar price of gold directly to the yuan, the PBOC has eliminated for now a level of foreign exchange risk to their gold portfolio. Have they done this to enable themselves to continue acquiring physical gold from the west at a "set price" ahead of further yuan devaluations? Is the PBOC planning for a trade war or a liquidation of their massive U.S. treasury position? Or, instead, are they planning for something much more significant?

A few years ago, this billboard was spotted across Asia. At the time, many wondered if there was a subliminal message being sent regarding the future of the yuan and its role in the global currency system. In light of all the recent moves by Chinese entities in London and New York—and given the now-prevalent correlation between the yuan and dollar price of gold—it's time again to consider the possible implications.

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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

Comments

Michael Rosenberg
July 10, 2018 at 9:11 PM
You may also want to note that before the Yuan became a part of the SDR basket, no correlation. Afterwards, a direct peg between the SDR and the Yuan. Hmmmmmm
Richard
July 11, 2018 at 8:29 AM
I believe that in recent months , the price of gold has been pegged to the New World Currency ( from IMF ) , the SDR. 900 SDR EQUALS 1 troy oz. Gold done ever so quietly. !. The Chinese have implemented 2 macro themes; 1. Accumulate massive gold reserves. 2. Accumulate MORE than their allocated shares of SDRs through various clever currency trades. Worldwide Implications are clear..... the Bejing Pandas will win the world series over the Shanghai Samurai in 2020 through 2024. The NY Yankees will be a AA farm baseball team. Wahington DC will be a swamp , with grasslands, wetlands , and mosquitoes.