China’s Central Bank recommends gold for “Value Preservation”

March 29, 2011 by · Leave a Comment
Filed under: Commodities News 

Sounds like good advice in the time where we are trying to get out of the biggest financial crisis since the Great Depression.  We are dealing with record global budget deficits and central banks that are seemly standing ready to print as much money as needed to try and revive the economy.    This means a serious devaluation in the current purchasing power of your currency.   Gold does a very good job (some would say par excellence) for preserving relative purchasing power as a wealth saving instrument.

The Chinese government have been signaling this to their citizens for over 2 years now.   We should be wise and take heed to this advice.  We would be stronger as a nation if we had a large private savings in this country that was not just in U.S. dollars.  What this would mean is lets say we have a currency collapse, we would have serious pain while we figured what new monetary system to bring into being, our population would have hard currency that they could use to get goods into this country.   Its just like having insurance but you hold the policy so you would not need to worry about some third party going out of business and not being able to follow through on their obligation.

There could be a political motive for this as well, all our major commercial banks having sizable short positions in gold and silver.   No bank or government wants to see the gold price reflect their true value because that would be much higher and then you would have to talk about what caused this on all the financial channels and this would not be a fun conversation.   Now lets says many Chinese people start buying more gold and sliver, this would force the commercial banks to cover their position or close it out and that would do two things.

First, it would cause major losses when settling these short positions.  Second, as they shorts were retired, it would drive the precious metals price much higher.   This would complicate U.S. policy on economic issues.  I don’t know what the Chinese motive is, but I wanted to lay out an alternative scenario.

Forbes – The People’s Bank of China(PBOC) recommended yesterday that 1  billion Chinese consider buying gold as a  hedge against inflation and to preserve values in a world where currencies can fall. The PBOC Financial  Markets Review came out just  as several major currencies  were indeed declining in value against gold; the dollar,1%,  the Swiss franc,2.5%, t he  British pound, 2%, and the Japanese yen, 2%.

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