Gold fell $22.50 or 1.68% yesterday and closed at $1,319.90/oz.
Silver slid $0.30 or 1.47% and closed at $20.16.
Recent media reports in China and Russia suggest that China is continuing to consider backing the yuan with gold. Since 2005, we have said that such a move by China was likely as China seeks to become a superpower and lessen and undermine U.S political dominance.
This decision, if taken, may lead to huge volatility in foreign exchange markets, a depreciating dollar and ultimately an international monetary crisis.
John Butler in his book ‘Golden Revolution’ and Jim Rickards in his book ‘Currency Wars’ have warned that China and or Russia could move to back their currencies with gold which would then lead to the U.S. and EU having to follow suit in order to prevent currency crises thereby leading to a new gold standard.
According to media reports, the People's Bank of China is considering phasing out the dollar as the reference currency or peg for the yuan, and to start using gold as the reference point.
The reports have not been confirmed officially, but there has been official comments to that effect in recent years and Chinese academics have advocated backing the renminbi or yuan with gold.
Beijing's possible move to back the yuan with gold would be a strategic move in order to, lessen the risk of inflation, increase the yuan’s attractiveness as an investment medium and create faith in the yuan as a reserve currency
Besides being an important financial and geopolitical move it would also be a symbolic act intended to show the U.S. and the world that they are capable of taking the risks associated with a departure from the dollar standard.
It would be a strategic gamble and while it would cause much short term economic pain for China and indeed the world - it could lead to long term benefits. The Chinese tend to think long term rather than quarter to quarter.
The move could in time lead to more stable long term economic growth rather than the boom and bust cycles of recent years.
The Chinese authorities have been pushing for a more international role for their currency and as an alternate reserve currency to the embattled dollar and euro. Indeed the Bundesbank recently admitted that the yuan was becoming a global reserve currency.
With gold now traded in yuan, it appears to be only a matter of time before oil is traded in yuan thereby positioning the yuan as the petro yuan and a rival to the petrodollar as the global reserve currency.
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