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Could the Yuan Joining the SDR Boost Gold Market Confidence?

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The true Chinese stockpile of gold could influence markets.

Christopher-LemieuxSMBullion.Directory precious metals analysis 21 April, 2015
By Christopher Lemieux@Lemieux_26
Senior Analyst at Bullion.Directory; Senior FX and Commodities Analyst at FX Analytics

The potential importance of the yuan within the global financial system is fueling speculation that if the yuan is excepted by the International Monetary Fund (IMF), to be including in the Special Drawing Rights (SDR), the result would help support the gold market. 

It is no secret that China has been rapidly increasing their gold reserves, in part to diversify $3.7 trillion in foreign exchange results (most of it being dollars). What is a secret, a tightly kept one by the People’s Bank of China (PBOC), is exactly how much gold China holds, leading most to speculate that it is a lot more than official documents suggest.

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The Chinese government has been aiming for the yuan to become sturdy enough to achieve reserve currency status. That is not to say it will take over the dollar, but the SDR includes four “reserve” currencies: the US dollar, Sterling, euro and the yen. If the IMF were to include the Chinese currency within their basket, this would be a big step for the yuan. A secondary reason for China’s gold buying spree is to increase the yuan’s stability.

It could be possible that China announces their gold reserves once the yuan receives a “reserve” currency status by the IMF. This would only bolster the yuan’s positioning in global foreign-exchange, and it could increase the demand for yuan as investors look for intrinsically value-backed fiat during the ongoing currency war.

It would be a big boost if the yuan is accepted into the SDR. There is even speculation that the SDR could even include physical gold, which would only strengthen countries that increase gold holding.

The IMF will determine whether or not the yuan is suitable next month. This comes as the US strongly contests the yuan’s position in global finance.

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