Why China is Doubling Down on Precious Metals

China, a major world power and a growing influence on the overall global economy, is making major moves towards gold and silver. Not only has the government been increasing its stockpile of the precious metals in reserve as an alternative to paper money, but they’ve also encouraged its citizens to do the same, as an alternative means of wealth preservation.

Seeking Alpha offers three reasons why the Chinese government may be renewing their emphasis on physical gold and silver, especially in regards to pushing their citizens towards them:

  1. China sees precious metals as an opportunity to control inflation. As the supply of goods for the Chinese to consume continues to shrink, it is safe to assume an inflationary monetary policy where paper currencies decrease in value and precious metals simultaneously increase in value.
  2. The policy switch will also allow the Chinese to increase the nation’s supply of gold and silver without actually buying them or creating market panic. If China were only to increase its official gold reserves, it would inevitably generate a market panic that would drive the price of gold higher. But by allowing its citizens to accrue precious metals, they have enabled a domestic supply that Chinese authorities could potentially confiscate in the future.
  3. Lastly, the article argues that China is likely to be in favor of holding precious metals in reserve because of their current change in leadership. This marks the first time the world has seen such a power transition in an economy that has grown so rapidly in such little time; allowing its citizens an alternative to paper currencies will help make them feel a little more at ease and economically secure during such a capricious time period.

Whatever the reasons are for China’s policy change towards precious metals, there is little denying the country – the government coupled with its 1.3 billion private citizens – could have a nearly insatiable appetite for accumulating gold and silver, thus driving up global demand and prices.

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