China Is Using Gold To Replace the U.S. Dollar

China's Gold Strategy: A New Financial Era?

Introduction to China's Gold Strategy

• China is attempting to relink gold directly to its currency, a move unprecedented in modern history, aiming to fundamentally change the monetary system.

• The People's Bank of China has emerged as the largest buyer of gold globally, indicating a strategic shift away from reliance on US treasury bonds.

Impact on Global Currency Dynamics

• China's actions include establishing the Shanghai Gold Exchange, now the largest physical gold marketplace worldwide, and creating a "gold corridor" for trading among BRICS nations.

• This strategy aims to restore trust in the yuan by backing it with gold, contrasting with the dollar's vulnerabilities such as freezing assets and inflation risks.

Reclassification of Gold Assets

• As of July 2025, gold has been reclassified as a Basel III tier 1 asset, equating its value with cash or treasuries on bank balance sheets.

• Future upgrades may classify gold as a high-quality liquid asset (HQLA), enhancing its utility in financial systems and enabling broader use in repo financing.

Shifts in Global Trust and Asset Allocation

• The global perspective on trust in currencies is shifting; previously dominant US dollar reserves are declining due to geopolitical tensions exemplified by frozen Russian assets.

• Countries are increasingly wary of holding dollars since they can be seized or restricted at will, prompting central banks—especially in emerging markets—to diversify into gold.

Trends in Gold Accumulation

• Following tariff threats from the Trump administration, China's public accumulation of gold surged dramatically, signaling intent to reduce dependency on US treasuries.

• Current trends indicate that China's share of gold reserves may soon surpass that of US treasuries; estimates suggest actual holdings could be significantly higher than reported figures.

Gold's New Status and Its Implications

Gold Becomes a Basel III Tier 1 Asset

• In July, gold was designated as a Basel III tier 1 asset, allowing banks to recognize 100% of its value on their balance sheets.

• Previously classified as a tier three asset, banks could only count half the value of gold held, limiting its use in financial systems.

The Role of Gold in Banking

• Despite the upgrade to tier 1 status, gold cannot be used for lending or repo transactions, which are crucial for global financial stability.

• High Quality Liquid Assets (HQLA), primarily US treasuries, are currently essential for collateral in financing; if gold were included as HQLA, it could transform how countries finance projects.

China's Strategy with Gold and Currency

• China is promoting the yuan among BRICS nations by offering the option to convert yuan into gold, addressing trust issues regarding currency backing.

• At the recent BRICS summit, China proposed storing gold within a "gold corridor," enhancing security and accessibility for participating countries.

Building Trust Through Decentralization

• The "gold corridor" concept involves a network of geographically decentralized vaults connected to the Shanghai Gold Exchange (SGE), ensuring transparency and verifiability.

• This system aims to solve trust issues by allowing nations to verify ownership and purity of stored gold bars.

Understanding Gold's Role in Global Finance

The Challenge of Volatility

• The issue of volatility is critical when using commodities like gold as collateral for loans and trade, as price swings can undermine stability.

Stabilizing Gold Prices

• A proposed solution involves using a moving average to determine the settlement price of gold, averaging over the last 200 trading days instead of relying on daily prices.

• This method aims to reduce volatility and make gold more predictable, smoothing out price risks for users.

China's Strategic Moves

• China plans to leverage its network to assist countries needing financing, particularly in resource-rich regions like Africa.

• Countries in Africa can deposit their gold into the Shanghai Gold Exchange (SGE), allowing China to provide loans against this collateral through institutions like the New Development Bank.

Implications for Global Influence

• By financing development projects with gold-backed loans, China seeks to build influence while circumventing Western financial systems such as the IMF.

• This transition positions gold not merely as a commodity but as a significant financial instrument that can be used for lending and investment.

U.S. Response and Gold Repatriation

• The U.S. has begun repatriating its gold from overseas storage, which may be a strategic move in response to China's growing influence in global finance.

• Concerns about physical custody of gold arise if nations demand tangible assets rather than paper representations.

Future Demand for Gold

• Current guidelines suggest central banks should hold around 30% of reserves in hard assets like gold, potentially leading to an estimated $2 trillion increase in demand globally.

• As supply remains fixed, this surge could significantly elevate gold prices over time.

Impact on Investment Landscape

• The evolving financial landscape raises questions about how these changes will affect investments in both traditional assets like gold and cryptocurrencies such as Bitcoin.

The Future of Currency: Competing Systems

The Role of Gold and Technology in Currency

• The U.S. is the largest exporter of paper money, but if China backs its currency with gold, the U.S. may need to respond by leveraging its strengths, potentially through gold or technology.

• Gold symbolizes trust over time due to its long history and physical nature, while Bitcoin represents trust through energy and mathematics, being digital, transparent, fast, and borderless.

• China's monetary system emphasizes control and hard collateral; conversely, the U.S. could gain an advantage through openness alongside hard collateral.

A Shift Towards Multi-Monetary Systems

• We may be entering a phase where multiple currencies coexist rather than a single global standard; this could lead to competition between gold-backed currencies from China and digital currencies from the U.S. and the West.

• If both systems emerge simultaneously, it could allow for consumer choice in currency types; asset prices might adjust rapidly as these changes unfold over 5 to 10 years.

Acknowledgments

• The speaker expresses gratitude towards TFTC21 for insights shared on his podcast and mentions Serenk's newsletter as a valuable resource for further exploration of these ideas.