The US dollar is currently the world’s reserve currency based on it’s exceedingly high ‘reported’ gold reserves. Gold has been a traditional correlation between its value (in reserve) and the strength of currencies in general. The current global trades are conducted in USD due to the ‘gold backing’ that the US has, which is among the currencies in the IMFs currency basket along with the Yen, the Euro and the British Pound. However, policy makers have been pushing for the Yuan (Chinese currency) to be added to the SDR (Special Drawing Right) and recent reports of China preparing to revise its gold reserves has become a major concern for the United States as it has deemed to be a potential threat to the stability and of the dollar.

China’s Undisclosed Reserves

China has not reported its total gold reserves to the international community since 2009 when the Chinese disclosed the total amount of its gold reserves at 1,054 tonnes. The odd math that was involved in their disclosure aroused curiosity about China’s actual gold tally due to the fact that the country’s 2009 declaration indicated that its gold reserves practically doubled during the 2008 – 2009 buying cycle when the world financial system was in chaos – China added 454 tonnes to the reserves (MmStaff, 2015).

Economists and market watchers alike are predicting that when China reveals its total quantity of gold stash it will reveal an immense increase of what was delivered in their 2009 report. Bloomberg reported that their surveillance and intelligence gathering indicate that China would have tripled their gold reserves by now and the total reserves currently held could be well over 3,500 metric tons based purely on trade data and other figures that have been declared (Ng et al., 2015). At the advent of 2010, China became the 2nd largest economy in the world which makes the Yuan a viable trade reserve currency provided it had enough gold to back its currency that is coupled with its 3.7 trillion dollars in foreign exchange reserves, if this data released by Bloomberg holds true, then China would be holding the second largest stockpile of gold after the US which is rumoured to have squandered its gold reserves along with gold reserves of foreign nations – this however is still under the light of ‘rumours’ and have yet to be ‘proven or unproven’.

The Yuan’s Threat to the Almighty Dollar

Based on another report on Bloomberg Business, the dollar makes up slightly above 60 % of the global central back holdings followed by the Euro at slightly above 20 % and according to a report by SWIFT (Society for Worldwide Interbank Financial Telecommunication) 43 % of global balance trade payments were made using the dollar whereas the Chinese Yuan only accounted for 2 % of international trade payments. These are indications that the Chinese government in collaboration with Russia and India are preparing for a financial coup of the financial system and a report by UBS  stating that China had imported close to 1,500 tonnes of the precious metal in 2013 which was almost 50 % of of the total gold mined globally that year only reinforces this motive.

It is an undeniable fact that if China is fortified with sufficient gold, the Yuan could replace the dollar as the world reserve currency taking into account the United States huge deficit that runs into the trillions. Looking at the scenario from a different perspective, even if the Chinese were to exchange even 50 % of its nearly $4 trillion in foreign exchange into gold, the Yuan has the potential to actually reconstruct the international financial system, however the risk for China to convert its reserves into gold bullion for the sole purpose of displacing the U.S. as having the biggest gold stockpile is high.

Currently the strengthening of the dollar has diverted the attention of investors away from the precious metal and the possibility of the Feds of boosting interests rates is effectively making the dollar more attractive than gold related investments, however the recent issues transpiring in the Euro zone is complicating things and China’s move towards stabilising Chinese stock (which has been effective over the last few days) has opened the doors towards a ‘tug – o – war’ that is seeming in favour of the BRIC community. There is plenty of room for China to move about and the current trade waves and alliances formed by growing and emerging economies are starting to shake the foundations of the current weak financial systems that are in place.