Ken Hoffman, Global Head of Metals & Mining Research with Bloomberg Intelligence, spoke with Kitco News about the possibility of China putting its yuan currency on a gold standard. Hoffman emphasized it is not difficult to imagine, because China has been laying the groundwork for years – buying up gold, starting a gold bank, building extra vaults, and soon launching a yuan gold fix. He believes the timing of it largely hinges on whether or not the International Monetary Fund decides to accept the yuan into its basket of reserve currencies this year.

A gold standard, plain and simple, is not a big constraint on a currency. It actually is something that worked for hundreds, if not thousands of years. It’s not this horrible thing… [A Chinese gold standard] would be a game changer. It would make gold very interesting. It would make it a currency again in terms of the way the rest of the world looks at gold.

Highlights from the interview:

"[China] wants to make the yuan international. The issue they have is they’ve issued a lot of yuan. If you were to just put it on a dollars-to-dollars basis how much money China has put out there, they have more money in the world than the US and Europe combined. The reason this doesn’t cause a lot of inflation is because the yuan isn’t internationalized. You can’t freely trade it, so they’ve been able to keep a lid on the value of the yuan. The question is if they are going to go and make this international, how do they back that currency so it doesn’t collapse? That leads us to at least consider: could they go on a gold standard?

"It all depends on how they may do it. One of the things to watch is later this year, the IMF is supposed to decide does the yuan become part of the currency that can be held as a currency reserve in banks. If they’re not allowed, they may consider something like a gold standard, just like when they were not allowed to get more votes in the World Bank, they started the Asia Infrastructure Bank. So they may almost be preparing for failing…

"They’ve already started to do just that [back the yuan with gold]. They’re laying the groundwork. They’ve built vaults. They’re the world’s biggest buyer of gold. They’ve started a China gold bank two months ago, where they say they’re raising $16.5 billion to buy gold for other central banks to put their gold in China. So they’re doing a lot of the building blocks, so if they wanted to, they could build a gold standard…

"We officially know they hold around a thousand metric tons. They only updated that six years ago. We know the US has about 8,800 metric tons. Our guess at Bloomberg Intelligence is that they have around 3,600 to 4,000 metric tons. If it’s quite a bit more than that, it gives them a lot of leeway to go out there and back the currency…

"A gold standard, plain and simple, is not a big constraint on a currency. It actually is something that worked for hundreds, if not thousands of years. It’s not this horrible thing. You do have flexibility. Why? Because you say, ‘I have this currency, and this much currency is worth an ounce of gold.’ It doesn’t have to be the spot price, it can be any price they fix. Interestingly enough, China is starting their own yuan-based gold fix. So there’s a lot of things they could do to make this work…

"It would be a game changer. It would make gold very interesting. It would make it a currency again in terms of the way the rest of the world looks at gold. Obviously it would have a major impact, particularly if China wanted to grow their currency, they’d have to go out and buy a lot of gold. They’d be a major buyer in the marketplace at all times. That would be a very bullish factor. If they did go for it, trust me, we’d be talking about fireworks."