Will China Ban Gold?

| About: SPDR Gold (GLD)
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Summary

The dollar is simply too attractive for investors to consider gold or gold-based ETFs right now.

The Chinese government may take actions to restrict the gold market. If China's currency situation worsens, the government may take drastic steps.

A Chinese ban on gold would severely hurt the market.

Gold's strength as an investment depends on what currency you buy it with and what your objectives are.

For someone who lived in the Weimar Republic, gold would be a pretty safe bet. The metal can still benefit investors in places like Venezuela, Russia, and even the United Kingdom because of the inflation and currency weakness in these nations.

Source: Spectator.uk

However, for Americans privileged to hold the mighty dollar, there seems to be little reason to invest in the yellow metal at this point. American currency will be a better store of value for the foreseeable future.

Several governments have adopted policies specifically aimed at crushing domestic physical gold demand in their borders. If you live in one of these countries, stock up on gold before it's too late. However, if you don't, avoid the metal.

Dollar-denominated gold ETFs like the SPDR Gold Trust (NYSEARCA:GLD) should be wholesale avoided because they track the metal in a currency it underperforms in.

Is China Declaring War on Gold?

For many people the term "made in China" has almost become synonymous with cheap and low quality. This sentiment extends to the hard-asset investment opportunities in the country.

China is one of the "fakest" major economies on earth. By this, I mean GDP numbers are untrustworthy; the housing market is artificially propped up; the stock market is propped up, and the nation has a lack of reliable hard assets, except for gold and foreign currency.

When it comes to real estate, the options are poor. Housing prices in top-tier cities are among the highest in the world, but the quality is often at third world levels. Many expats claim the buildings begin to deteriorate within a year of their purchase.

On top of this, all property in China is owned by the government - buyers are only allowed to lease their houses for a specified amount of time.

These problems have led to massive capital flight out of the country as Chinese investors convert their yuan into dollars, euros, and gold. This capital flight comes at a time when the yuan has been hit hard by the election of Donald Trump to the U.S. presidency, and the country cannot afford to run through its foreign exchange reserves.

Yuan Weakness

US Dollar to Chinese Yuan Exchange Rate Chart

US Dollar to Chinese Yuan Exchange Rate data by YCharts

Falling Forex Reserves

Source: Financial Times

In a perfect world, these developments would send physical gold demand through the roof, as a nation of over 1 billion looks for a reliable place to store its wealth and turns to bullion. However, government intervention interrupts the free market and prevents this from happening.

Reports suggest that the Chinese government is restricting the ability of gold imports into the country. China is the biggest producer of gold in the world, so it is unlikely that this policy will have a significant impact on its own - unless the Chinese government goes further.

Will China Ban Gold?

I would not put a move like banning gold past an authoritarian regime like the Chinese Communist Party. If the Chinese government feels justified in banning gold, I believe it would do it.

When we look at the precedent set by India, a democratically run nation that arbitrarily outlawed over 80% of its currency outstanding overnight, similar actions in China do not seem farfetched. Remember, only 11 years ago, Chinese citizens were fully prohibited from holding the metal.

There are three reasons why the Chinese government may consider banning private ownership of gold:

1. To keep money in the inflated real estate market by restricting other hard-asset investment opportunities.

2. To keep money in the stock market.

3. To sustain dollar reserves in the country by preventing these dollars from being used to purchase gold.

Conclusion

Gold is not a secure investment for holders of the U.S. dollars and is better suited for investors who want to get out of weakening or inflationary currencies.

The actions of the Chinese government are bad news for the gold market in the short term. If its anti-gold policies intensify, there could be long-term negative consequences.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.