China on Tuesday launched a yuan-denominated gold price fix in its bid to become a

price maker in a market dominated by London and New York.

Although the impact of China's gold fix will likely be limited now in a closed monetary
system, there is potential for opportunities in the future when the currency achieves full
convertibility, Shakarchi indicated.

"Ultimately...I see them uniting the (offshore yuan) CNH and CNY (onshore yuan). (The
currency) will be fully convertible and it will be easier to import gold into China

China needs a lot of gold to launch full convertibility

While it is believed that the US Federal Reserve holds about 8,133 tons of gold, the rumors circulated that
things are not what they seem and "the gold chamber of Fort Knox" are nearly empty, Engdahl narrates.
Adding more fuel to the fire are doubts surrounding US' official gold statistics, a strange event occurred
in 2012.
"In 2012 the German Government asked the Federal Reserve to return German central bank gold 'held
in custody' for the Bundesbank by the Fed. Shocking the world, the US central bank refused to give
Germany her gold back, using the flimsy excuse that the Federal Reserve 'could not differentiate German
gold bars from US ones' Perhaps we are to believe the auditors of US Federal Reserve gold were laid
off in the US budget cuts?" the researcher asks.
The researcher points out that on November 27 Russia's Central Bank reported that it has included the
Chinese Renminbi (yuan) into its official reserves for the first time.
Furthermore, in August 2015 Russian currency traders bought almost 18 billion yuan and only 3 billion US
dollars. It is obvious that Russia is gradually increasing the use of the yuan in Russian financial markets,
substituting it for the US dollar.
"But the actions of Russia and China to replace the dollar as mediating currency in their mutual trade, a
trade whose volume has grown significantly since US and EU sanctions in March 2014, are not the end
of it," the researcher remarks.

I'm going to assume that in this scenario, China still uses some sort of paper (and electronic)
money after the conversion, and bases the value of the yuan on some stockpile of gold for
which the cash can be exchanged. The alternative here would be to convert (revert?) to using
gold coins, which is less practical and means electronic banking vanishes.

I'm also going to assume they found some way to scrape together enough gold so that they
didn't completely impoverish their country by trying to buy several trillion dollars' worth of
gold on the open market. According to the CIA World Factbook, China in 2012 had a stock
of about $5 trillion dollars in 'narrow money,' which is the total amount of currency and
coins - the physical bills and such - in circulation, along with the cash in demand deposit
accounts, like the cash in checking accounts. It's a measure of how much a country could
bring together in the immediate future - "by close of business today," for example - to pay
for something without using debt. To meet this assumption, they'd have to find some way of
having $5 trillion in gold reserves at (today's) market price.

However, even if I assume they found some way to back their $5 trillion in cash directly with
gold without upsetting the gold market, it's not clear how long things would stay that way.
Gold is traded on the market and has gone from about $400 in 2005, to a peak of $1,900 in
2011, to about $1300 currently. That suggests a purely gold-backed currency would be
extremely volatile, which makes doing business with them extremely risky. Much more than
the typical day-to-day currency risks would be, I mean.

Even if all contracts you negotiate with Chinese counterparts are one-offs, and all payments
and deliveries are settled instantly, you'd have to completely reevaluate how valuable it is to
do business with them every time. Say you ran a clothing outlet, and wanted to sell sweaters
this fall. You do some research and find that right now, the best price for sweaters for fall
delivery is from a Chinese manufacturer. Do you offer to pay them now or on delivery?

You have to be very careful about how you set this up. The price of gold between now and
delivery date can rise, fall, or stay the same, and your decision is to pay now or on delivery.
If the price of gold rises, paying for the sweaters will be more expensive on delivery because
your dollars will buy fewer yuan. If it falls, paying later lets you make out like a bandit.

[As an aside, your decision about which currency to use matters too, though the short
version is that if you pay your Chinese suppliers in dollars, rising gold prices are good, but if
you're paying the Chinese suppliers in yuan, rising gold prices hurt. Rising gold prices mean
paying (in dollars) on delivery fobs off the Chinese manufacturer with a less-valuable
currency, and falling gold prices mean you're paying top dollar (on delivery) for sweaters
that are suddenly more expensive. It's a bit like having to remember whether or not to
include a negative sign in your calculations more than anything else: important, but not
necessarily good or bad - so long as you remember to address the issue.]

It should be said that this sort of risk already exists any time two currencies don't track
exactly the same way. This is a recognized risk in international finance, and there are several
ways to address this risk: hedging with currency futures, forwards, and options. Without
going into too much detail, the idea here is to set up an additional agreement to buy (or sell)
the other currency when it's time to pay. If you do it right, you'll reduce the impact of the
currency changing value, regardless of whether it goes up or down, and have a stable idea of
how much the underlying agreement (our contract for the shipment of sweaters) is really
worth that doesn't depend as much on how the foreign currency moves.

The difference, though, is that most currencies are not nearly as volatile as gold. You can
still hedge this risk, and even in pretty much the same ways - that's one of the ways that
mining companies use to decide how much a new gold mine might be worth, after all - but it
can get cumbersome. For that matter, it may not be practical to do this sort of extra
financial legwork on an ongoing basis for many smaller buyers. If the value of a contract can
vary by about 33% in a handful of years the way gold has done, that's a pretty big risk for a
business to absorb, even with the currency hedging trick.

This holds true for both sides of the border, too. Business isn't a zero-sum game, since no
one in their right mind would accept or offer a contract if they didn't think it made them
better off than they'd be without it, but contracts work better with less risk. Regardless, both
sides of the agreement would face steeper up- and down-side risks with gold rather than a
stable currency.

So, what does all this mean? It means that basing the currency on some volatile asset like
gold means anyone who does business with that country faces a higher currency risk that
can potentially wipe out the profit of any trade with that country. It could turn those same
trades into lottery wins, too, but if we're counting on gains from the currency shifting with
gold prices, we could just speculate on gold prices directly and not bother with selling
sweaters.

That means we stop buying their sweaters.

Eighteen institutions including top Chinese banks such as Bank of China and ICBC, as
well as Standard Chartered and ANZ will join the benchmark fixing.

The yuan gold fix will come up against the London Bullion Market Association's spot
benchmark set twice a day with 12 participants.
 Swiss trading house MKS' chairman Marwan Shakarchi said China's growing
consumption of gold supports the set-up of the fix.

"To have a benchmark price in renminbi ... will help both consumers and producers in
this part of the world," said Shakarchi. MKS is one of the 18 trading members of the
yuan gold benchmark.

Although the impact of China's gold fix will likely be limited now in a closed monetary
system, there is potential for opportunities in the future when the currency achieves full
convertibility, Shakarchi indicated.

"Ultimately...I see them uniting the (offshore yuan) CNH and CNY (onshore yuan). (The
currency) will be fully convertible and it will be easier to import gold into China," added
Shakarchi.

Last Year, International Monetary Fund (IMF) included Yuan as a fifth currency in its Special
Drawing Rights (SDR) basket, giving it a weightage more than Yen and Pound. Still lots of reforms
are required to be pursued to make Yuan globally acceptable as alternate reserve currency and
China seems determined to make that happen. It has taken several steps in that direction yesterday.

Shanghai Gold Exchange, first launched its Yuan denominated Gold benchmark yesterday for which
rate will be set twice daily. This is an attempt to make the Yuan denominated Gold market
international.
Second one is even more crucial. Hong Kong Stock Exchange (HKSE) has announced that it will
launch four Yuan based exchange rate futures from second quarter this year, which will make the
Yuan market more liquid. These instruments are, EUR/CNH, JPY/CNH, AUD/CNH and
CNH/USD. HKSE already provides, USD/CNH future, which is worlds most traded Yuan future and
growing. Average daily open interest has increased 300% from a year back.
In Addition to the above, China and Russia are negotiating to set up an offshore Yuan center and
issue Yuan denominated bonds.
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The launch could eventually reduce the influence of the London gold price, which
started in 1919 when bankers at NM Rothschild & Sons in London sat down to
 calculate a fair price for gold. That became the global gold benchmark, used by
miners, central banks, jewellers and the financial industry to trade gold bars.
Last year the London price moved to an electronic auction system, after critics
charged the fix was opaque and vulnerable to market abuse. In 2014 the
Financial Conduct Authority found that a Barclays trader had manipulated the
London gold fix and the British bank was fined 26m.
China needs a gold benchmark that reflects local market flows and reduces
golds price dependency on the US dollar, Roland Wang, managing director for
China at the World Gold Council, an industry body, said. An Asian-focused,
yuan-denominated benchmark will significantly increase the liquidity and
efficiency of the gold price discovery mechanism.
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Six of the top 10 globally traded futures contracts are now on Chinese exchanges and prices
from iron ore to copper are increasingly set in the country, which is the largest importer of
almost all commodities.

However, until the countrys currency gains international reserve status, the Shanghai Gold
Benchmark Price should not have much of an impact on the gold market, say analysts.

Id see this as a minor technical change for the convenience of the local market rather than anything
with global implications, Julian Jessop, chief commodities economist for U.K.-based Capital
Economics, told Kitco News in an email response.

Some domestic players may prefer to be able to price (and hedge) in renminbi terms. But this will not
materially affect the balance of supply and demand in the market, he added

I see it is easy for commentators to read too much into it, saying this boosts the yuans stature in
international markets (it does not) and may reflect the government's desire to make gold part of a
currency system (it is not and the government does not want that anyway)
He added, the Shanghai Gold Exchange benchmark price simply shows a move toward shifting
golds price-making center away from London towards Asia

However, Ruth Crowell, chief of the London Bullion Market Association, doesnt seem too
concerned, noting that the LBMA is always supportive of initiatives to increase transparency and
price discovery in the bullion markets.
George Gero, managing director with RBC Wealth Management, mirrored Crowells comments in
that he welcomed the change in the gold market.

It will be key as to how this develops and if China further integrates gold into their monetary system.
With its debt and currency issues. Gold may have a bigger role to play,
An Asian-focused, yuan-denominated benchmark will significantly increase the liquidity and efficiency of
the gold price discovery mechanism - See more at: http://www.bulliondesk.com/gold-news/focus-china-
launches-yuan-gold-fix-seeks-more-influence-commodity-pricing-112294/#sthash.xB8rZXcU.dpuf

Bloomberg conservatively estimate Chinas gold reserves at around 3150 tonnes although many
analysts believe the figure to be much higher.

In order to back $5.4 trillion yuan with 3150 tons of gold, the gold price would need to be in the
region of $48,600 per ounce.

Bloomberg conclude that, at todays prices, it would be basically impossible for China to fully
back its yuan with gold. Indeed, at $1,200 per ounce, it would require over 126,000 tonnes to back
$5.4 trillion.

Credit Suisse Group AG is advising its private-banking clients to bet the greenback will gain
versus a basket of peers that includes the South Korean won, Taiwan dollar, Thai baht and
Philippine peso. UBS Group AG said investors should buy the currency against the Singapore dollar
and yen. Stamford Management Pte, which oversees about $250 million for Asias rich, urged
clients to buy the U.S. dollar each time it falls below S$1.35.

Gold was finite, but credit elastic. China has $3.2 trillion in reserves, over half of
which is denominated in US dollars, mostly US Treasury notes. The dollar has no
greater friend than China because its wealth is held in dollars. Still, inflation
looms. China cannot dump its Treasury notes; the Treasury market is deep, but
not that deep.
If Chinese selling of Treasuries became a threat to US interests, a US president could
freeze Chinese accounts with a phone call.

The Chinese know this. They are stuck with their dollars. They fear, rightly, that the US
will inflate its way out of its $19 trillion mountain of debt.

Chinas solution is to buy gold. If dollar inflation emerges, Chinas Treasury

holdings will devalue, but the dollar price of its gold will soar. A large gold reserve
is a prudent diversification. Russias motives are geopolitical. Gold is the model
21st century weapon for financial wars.
The US controls dollar payments systems and, with help from European allies,
can eject adversaries from the international payments system called Swift. Gold is
immune to such assaults. Physical gold in your custody cannot be hacked, erased,
or frozen. Moving gold is a simple way for Russia to settle accounts without US
interference.
Countries are also acquiring gold in advance of a collapse of the international monetary
system. The system has collapsed three times in the past century. Each time, major
financial powers came together to write new rules.

This happened at Genoa in 1922, Bretton Woods in 1944, and the Smithsonian
Institution in 1971. The international monetary system has a shelf life of about 30 years.

It has been 30 years since the Louvre Accord (an upgrade to the Smithsonian
Agreement). This does not mean the system will collapse tomorrow, but no one should
be surprised if it does. When the financial powers next convene to reform the system,
there will be no appetite for the dollars exorbitant privilege.

The Chinese yuan and Russia ruble are not true reserve currencies. The only feasible
benchmarks for a new system are the IMFs world money, called special drawing
rights, and gold.

Critics claim there is not enough gold to support the financial system. Thats nonsense.
There is always enough gold, its just a matter of price.

Based on the M1 money supplies of China, the eurozone, and the US, and with 40pc gold
backing, the implied non-deflationary price of gold is $10,000 per ounce.

At that price, a stable gold-backed monetary system could be sustained. When it

comes to monetary elites, watch what they do, not what they say.
While elites disparage gold at every opportunity, they are buying it, hoarding it,
and preparing for the day when ones gold determines ones seat at the table of
systemic reform
One of investors' biggest concerns is that the move from central banks in Europe
and Japan to implement negative interest rates will fail in its aim of stimulating
growth and fending off the threat of deflation.
China's gold benchmark is the culmination of efforts by China over the last few years to
reform its domestic gold market in a bid to have a bigger say in the bullion industry, long
dominated by London where the global spot benchmark price is currently set. As is well
known, as the world's top producer, importer and consumer of gold, China has balked at
having to depend on a dollar price in international transactions, and believes its market
weight should entitle it to set the price of gold.

Finally, when Chinese capital capital flight into Canadian real estate and offshore
tax havens is curbed, we expected that gold could well follow the path of bitcoin,
which has doubled since our article presenting it as an attractive alternative
to avoiding Chinese capital controls.