Is China’s New Gold Mine a Game Changer?

• China is attempting to internationalize the yuan and challenge the US dollar’s dominance as a world reserve currency
• The recent discovery of a potentially massive gold mine in China could help China accumulate greater gold reserves in an attempt to shape global financial rules
• Some market analysts believe that the shift of physical metal from West to East is helping put Chinese precious metals markets at the forefront of price discovery, which could help China’s goal of dominating the world monetary order

Gold has played an important role as a monetary metal and as a safe haven asset for centuries. Its value and importance has given rise to numerous terms: gold medal, gold standard, golden rule.

And, with all respect to Jesus, one of the most important golden rules throughout history has been that he who has the gold makes the rules. Those who hold gold (wealth) are often able to dictate financial terms to those who don’t have gold.

Today the United States is the world’s largest gold holder, with over 8,000 tonnes of gold in its official reserves. As you might expect, the US has, since the end of World War II, dominated the international financial order.

The dollar is the world’s reserve currency, the International Monetary Fund and World Bank are both headquartered in Washington, DC, and access to the US banking and financial system is almost a requirement for any financial institution around the world to operate.

That has chafed other countries, particularly countries like China who have their own ambitions. And in recent years China has made explicit its desire to internationalize the renminbi (yuan) and dethrone the dollar as the world’s reserve currency.

Many people have speculated that China may try to do this by backing the yuan with gold, or by creating a new gold-backed currency for international trade in order to challenge the dollar’s supremacy.

The Chinese central bank has been a steady and consistent buyer of gold over the last few years, and China is now not only the world’s top producer of gold but also the world’s top consumer of gold.

Now comes news from China that Chinese geologists have discovered what could be the world’s largest gold mine, with potentially up to 1,100 tonnes of gold reaching down nearly two miles into the earth.

Not only would this mine surpass the world’s current largest gold mine in South Africa, its gold is also of an unusually high grade. In some places this new gold mine is thought to be able to produce up to 138 grams (4.44 troy ounces) of gold per tonne of rock.

For comparison, consider that an average grade underground gold mine produces 5-8 grams of gold per tonne of rock, while anything above 8 grams is considered high grade. This new mine could potentially produce over 17 times more gold per tonne of rock than an average gold mine.

Adding to Chinese geologists’ joy was the fact that drilling around peripheral areas of the mine discovered even more gold, so this mine may not be the only source of new gold for China.

Now, this gold obviously isn’t going to add immediately to China’s gold reserves, and it’s going to take a lot of time and effort to mine and process it. But if this mine does pan out, or if even more gold is found in surrounding areas, it could bolster China’s gold holdings.

The question is, though, could this mine be a game changer when it comes to the international monetary order and China’s goal of becoming the dominant player in that order?

The Importance of China to Gold

There is a growing sense in many corners that China is becoming increasingly important to the gold market. Besides being the world’s largest producer and consumer of gold, China is also looking to establish its metals exchanges as competitors to London and New York.

In fact, in the minds of some precious metals analysts, China is already taking the lead from the West when it comes to precious metals price discovery. Due to shortages of physical silver in the West, prices in China have been consistently $10-12 per ounce higher than in the West.

This allows for arbitrage opportunities, and so metal is flowing from West to East, as Chinese exchanges serve the physical needs of buyers in China who need physical silver for industries such as the solar industry, which relies on silver to build the photovoltaic cells in solar panels.

In the view of these analysts, it is only a matter of time before markets acknowledge that Chinese exchanges have become the dominant players when it comes to price discovery. And if dwindling precious metals supply in the West is one reason behind that shift, then this newly discovered Chinese gold mine could play into that too.

China is already the world’s largest consumer and producer of gold, and the world’s second-largest consumer of silver.. If precious metals from Western inventories are flowing to China, China’s gold and silver holdings could increase significantly.

Couple that with the discovery of this new mine and you have a scenario in which China could eventually end up holding much of the world’s gold and silver. And as they say, he who has the gold makes the rules.

If gold and silver continue moving out of Western warehouses and into Chinese warehouses, China could end up being in the driver’s seat when it comes to dictating what happens to precious metals markets internationally. And if China wants to put gold back at the forefront of the international monetary system, large gold holdings could be the way to do it.

Now, this doesn’t mean that China is going to be able to accomplish this anytime soon. China just made its 16th consecutive month of gold purchases, but only for 1 tonne.

With about 6,000 tonnes to go before it reaches the US government’s level of gold holdings, even 10 tonnes a month of purchase would take decades to reach parity with the US. But at current market prices, 6,000 tonnes of gold is only about $1 trillion in gold.

China’s total foreign reserves total about $3.36 trillion, so buying another 6,000 tonnes of gold isn’t something that is financially impossible for China. But again, it won’t happen overnight.

The Future of Gold and China

With China’s stated ambition of dethroning the dollar, its massive gold production and consumption, and the growing importance of China to precious metals markets, it could only be a matter of time before China becomes the world’s most dominant player in precious metals.

If China were to successfully dethrone the dollar, and to tie a new international currency to gold, it could mark a renaissance for gold in the international monetary order. It could also mean that the value of gold could increase, as it would be in greater demand for international financial transactions and as a reserve asset.

Gold owners could benefit if gold becomes the centerpiece of a new international monetary order, as gold revaluation could be accompanied by a diminishing importance of “paper” gold markets, as physical demand will take center stage versus financial settlement of gold purchase contracts.

It may take years still for China to dethrone the dollar, or for gold to take center stage once again, but if it does, wouldn’t you hope that you own gold when that happens?

With gold setting record highs recently, how much higher could gold go if it becomes the linchpin of the international monetary order?

Now is the time to start thinking about buying gold, to make sure that you own gold so that you can benefit from any potential future price gains, but also to make sure that by owning gold you’re not necessarily at the mercy of being dictated to by those who do own gold.

With over $3 billion in precious metals placements and over 8,000 5-star reviews from our customers, Goldco has helped thousands of people just like you benefit from owning gold. Call Goldco today to learn more about how to buy gold and put it to work for you.