Chinese gold demand
It’s crucial to understand the potential benefits for China of having yuan-denominated gold. Besides internationalization, the fix may also increase the liquidity and efficiency of the gold markets. Yuan-denominated gold may also reduce the dependency of gold on the US dollar, though this may not hold true in the short run. In the longer run, gold may untangle from the US dollar.
According to the World Gold Council, in 2015, China’s gold demand hit 984.5 tons. The initiation of the yuan benchmark for gold is aimed at increasing the usage of the yuan as a global currency.
China likely believes that it should have a greater influence on gold prices, as it’s the biggest consumer of the metal. The demand from China may soon be completely directed to yuan-based gold. The higher the demand for yuan-based gold, the higher the demand for yuan currency.
China and the world economy
China could directly control the world gold markets once it has a significant chunk of the gold demand in the yuan. The above chart shows the current relationship of yuan to gold prices. The correlation between the two also remains weak, unlike the US dollar.
China has already acknowledged that it wants gold to play a much more important role in the world monetary system, and it’s also likely downplaying its gold holdings. With the larger influence of gold in the financial system, China may get in a position to dominate global economies.
The changes in gold price often amplify the changes in leveraged funds like the Direxion Daily Gold Miners (NUGT), the Direxion Daily Junior Bull Gold 3X (JNUG), and the Direxion Daily Junior Gold Bear 3X (JDST).