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Money & Central Banking
/The Real Reason We Left the Gold Standard
/The Real Reason China Is Hoarding Gold

The Real Reason China Is Hoarding Gold

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The Real Reason China Is Hoarding Gold

I'm sure you've seen these kind of counters at the airport. Take your cash from one country and turn it into the currency for another country. This is a very different experience elsewhere around the world, particularly in the countries where gold is flowing to the most right now India, Russia, Turkey and China. If I go in here, I can buy as many Indian rupees with my US dollars as I want, as much as they have. There is no limit in India, Turkey, China, Russia and a variety of other countries, you are not freely allowed to trade the currency for other currencies, particularly the US dollar.

In India, you can only acquire 250,000 USD. China is 25,000. Turkey is 5,000. Russia it’s zero. And actually taking that money out of the country is a whole other process that requires forms, and often a refusal from the government to allow it. Now imagine for a moment that you have a briefcase and it's full of Russian rubles stuffed to the brim. You’re feeling good. Let's go buy some stuff. Maybe some caviar and vodka.

But tomorrow the Russian government says you can do whatever you want with that. Except trade those rubles for U.S. dollars. Think almost everyone would be like. But why? Russian troops on the move in Ukraine, with blasts heard in multiple cities, including Kyiv. Oh that's why. You have that same briefcase full of yuan. Chinese government says you can't buy dollars. But why? A prolonged housing crisis in China. Come on. when things go bad or even just become uncertain.

It is a universal human trait that we will protect what we have. You do not know how bad this is going to get. Dump the local currency for something more secure. Today, and for the foreseeable future, that is the US dollar, but also the Euro to a degree British pound and Swiss franc. By limiting how much of those you can buy what are called capital controls. Governments can prevent money from flooding out of the country in times of stress or panic, Which is the primary reason why gold is in such high demand in those four countries.

China, India and Turkey are importing huge amounts of gold, while Russia is not allowing any of the gold it mines, which is a lot, to leave the country. It's called a safe haven asset for a reason. Everyone looks at it like that, but it's not nearly of the same importance as it is to the people in places who cannot do whatever they want with their money, especially when there are fewer places to invest it within those countries.

Meager stock markets, housing crashes, low interest rates on saving accounts to people with money to spare. The siren song of moving money abroad is loud and gets louder during times of panic. But you can still buy gold. Legal market or the black market. A quarter of gold brought into China and India is smuggled. You can wear it. Gold rings, necklaces. What? It's not money to me. It's just jewelry. The world has permanently moved off the gold standard. But when push comes to shove in economies that are shakier than others, gold is and will be for the foreseeable future, the standard.