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In aworld filled with fiat currencies, how important is gold's role in thefinancial system? Proponents often view the precious metal as a hedge againsteconomic chaos, while critics typically claim gold is hardly more than anunproductive rock. Interestingly, some countries appear to believe gold isquite important, and one former Fed chair explains why.|
Alan Greenspan, who served at the helm of the Federal Reserve for nearly twodecades, recently penned an op-ed for the Council on Foreign Relationsdiscussing gold and its possible role in China, the world's second-largesteconomy. He notes that if China converted only a "relatively modest partof its $4 trillion foreign exchange reserves into gold, the country's currencycould take on unexpected strength in today's international financialsystem."
Greenspan also believes the downside risks for China stockpiling gold arelimited, at least from a pure investment point of view. "It would be a gamble,of course, for China to use part of its reserves to buy enough gold bullion todisplace the United States from its position as the world's largest holder ofmonetary gold," he wrote. "But the penalty for being wrong, in termsof lost interest and the cost of storage, would be modest."
The People's Bank of China has not formally disclosed any changes to its goldholdings in years, but it's believed that the central bank is purchasing goldto diversify its reserve holdings. In 2009, China announced that it boosted itsgold reserves by 454 tonnes via acquiring gold quietly over the previous fiveyears. That represented an impressive 76 percent increase in gold reserves.Today, China still shows that it holds 1,054.1 tonnes in reserves, but it'sspeculated by analysts to actually have around 2,000 to 3,000 tonnes.
Some market participants also believe China is building up its gold reserves tochallenge the U.S. dollar, which is currently the world's reserve currency. Afew years ago, China's official news agency, Xinhua, said, "Internationalsupervision over the issue of U.S. dollars should be introduced and a new,stable and secured global reserve currency may also be an option to avert acatastrophe caused by any single country."