China Likely Bought 10,000 Tons Of Gold…And If They Did, Here’s Why

My article “10,000 tons of gold… The math says China could have easily done it!”explains how it’s possible or even likely China has amassed 10,000 tons of gold. What it doesn’t explain is the context as to why this is so important. I know some now this story well, but for most, this needs repeating. A little History
Gold has long represented the primary means of rebalancing trade surplus / deficits between nations. As a nation ran a trade surplus with another, the exporter ended up with an excess of the importer nations currency. The primary means to rebalance was for the exporter to transfer back to the importer nation it’s currency in exchange for gold. If this continued, the importing nations falling gold holdings would represent a weakening currency…which would mean higher prices to the importing nation and less purchasing of the exporting nations goods slowing down the trade imbalance. Since the advent of paper money until 1971, this had been the general method to rebalance.
The US assumed the role of global reserve currency formally at the Bretton Woods conference just prior to the culmination of WWII. The agreement entailed the US dollar would be the ‘peg’ to which all other currencies would maintain their value within a /-1% band. This was the resolution of what had been lacking between the two world wars: a system of international payments that would allow trade to be conducted without fear of sudden currency depreciation or wild fluctuations in exchange rates. And of course, nations accumulating excess US dollars would be allowed to freely exchange them with the US for gold. And so it was from 1945 through 1971.

This post was published at Alt-Market on Friday, 07 November 2014.