I’m going out on a limb: I think the next bull phase in the gold market gets underway before October.
Why?
China.
But not due to runaway demand…
At an International Monetary Fund (IMF) forum last month, China’s central bank governor, Zhou Xiaochuan, made it clear he believes the renminbi is “ready for reserve status.” It would be a huge step for the Chinese currency, starting with the fact that it would be added to the basket of currencies IMF member countries can include in their official reserves. Billions would be invested in it.
What was the IMF’s reaction? “We welcome and share this objective,” said IMF Managing Director Christine Lagarde. “We are now working closely with the Chinese authorities in this regard,” added Director of Communications Gerry Rice.
They didn’t say they would accept it, but then again, they surely wouldn’t advertise it in advance.
What’s the connection to gold? If Chinese officials seek “reserve†status for the currency, they’ll want to announce their updated gold holdings beforehand.
Why? Two reasons:
- Currency strength. Demonstrating they hold ample gold reserves—certainly more than the official number of 1,054 tonnes—puts the currency on more solid footing. The IMF holds the world’s third-largest gold reserve, so this issue matters.
- Transparency. A gold reserve announcement would help quell worries about the country’s lack of data transparency, something that’s been an ongoing concern.
Regardless of China’s motivation to announce its gold reserves, the IMF might require it anyway, as it’s been over six years since the last update.
The review process for admitting a new currency is held only every five years. I seriously doubt Chinese officials want to wait until 2020. Meetings will be held soon, with the results announced in October.
