[Minings Australia Review] Gold is an indispensable topic in the financial world. In January 2017, the World Gold Council released data on gold reserves held by various countries. The top 10 countries were, in order: the United States, Germany, the International Monetary Fund, Italy, France, China, Russia, Switzerland, Japan, and the Netherlands. India ranked 11th. Notably, from July to November, Russia’s gold reserves increased by 7.28%, 20.09%, 16.55%, 40.4%, and 32.13%, respectively. China’s gold reserves stood at 1,842.6 tons, placing it fifth among all nations.

All countries are increasing liquidity and simultaneously boosting their gold holdings—yet they refuse to link gold to currency. This intriguing paradox compels us to reflect deeply.

[Under the New Normal, Gold Is Crucial to China’s Economic Security] The new economic normal has strategically positioned gold’s value and opened up new opportunities for the development of the gold industry. The gold market is the core of the gold industry. In the traditional financial market system, the gold market has been a dependent variable—its own fluctuations are not primary but rather triggered by external factors. Gold is the most loyal strategic ally of the Chinese yuan. Implementing a national gold strategy and a gold-driven innovation strategy, and enhancing the gold market’s “self-regulating” capacity, will help accelerate the internationalization of the gold mining sector and “Shanghai Gold,” speed up the internationalization of the yuan, and safeguard national economic security.

From the second half of 2010 to the first half of 2014 (from the end of the 11th Five-Year Plan to the mid-to-late stage of the 12th Five-Year Plan), over a period of 16 quarters, China’s economic growth rate continued to slow down under the combined constraints of domestic and international political, economic, and cultural factors. Since the start of reform and opening-up, GDP—previously characterized by long-term double-digit growth—has fallen to around 7.6%, marking the entry of the Chinese economy into a new normal of slower growth.

There is no doubt that in recent years, China’s gold industry has also entered a new normal, marked by adjustments and optimization of its industrial structure and a shift in growth drivers. In particular, international gold prices have experienced significant fluctuations, dropping from a peak of US$1,920 per ounce in September 2011 to US$1,046 per ounce by the end of 2015—a decline of over 45%. As a result, the gold market itself has become volatile. However, in fact, these fluctuations in the gold market precisely reflect the very role gold plays. Such volatility is not intrinsic but rather triggered by external factors; it is exogenous in nature. In the traditional financial market system, the gold market should be an “endogenous” market (in terms of quantity), while markets such as the stock market and foreign exchange market are “exogenous” markets. Gold prices reflect the overall state of the economic market system and serve as an “economic barometer.” Of course, with the continuous innovation of gold derivatives in the Chinese market, the gold market has acquired the capacity for endogenous innovation—this is a key factor enabling “Shanghai Gold” to stand shoulder-to-shoulder with “London Gold” and “New York Gold.” The role of gold and the gold industry in the broader national economy continues to grow in importance.

The central bank’s substantial increase in gold reserves has become a global highlight. A market economy is an economy of credit and confidence, and the credit crises triggered by fluctuations in confidence represent the greatest volatility in a market economy. It is both a historical tradition and a broad consensus that gold should serve as a credible backing for fiat currencies. In January 2013, Basel III officially came into effect, making gold a core component of the capital base for central banks in the 27 member countries. By the end of 2015, central banks around the world had become net buyers of gold. As of the end of June 2015, China’s People’s Bank announced an increase of 604 tons in its gold reserves; by year-end, its gold reserves reached 1,762.3 tons. By August 2016, these reserves had risen further to 1,828 tons, accounting for over 2% of its foreign exchange reserves and placing China fifth globally in total gold holdings. The central bank’s simultaneous increase in gold reserves and reduction of U.S. dollar foreign exchange reserves underscores gold’s increasingly important role in the nation’s financial landscape. Reducing U.S. dollar reserves helps bolster the confidence in the renminbi, while increasing gold reserves enhances the renminbi’s international credibility and resilience.

China’s gold market has achieved remarkable success in its own development and construction, becoming one of the fastest-growing gold markets globally. If “Shanghai Gold” were to establish a three-legged equilibrium alongside “London Gold” and “New York Gold,” it would help distribute international pricing power over gold and, to some extent, curb price volatility in the global gold market and other commodity markets, thereby safeguarding China’s economic interests.

In recent years, the People's Bank of China has successively released the “China Financial Stability Report” and the “China Monetary Policy Implementation Report” annually, placing increasing emphasis on gold and the gold market. It has put forward guiding principles for the development of the gold market’s infrastructure and institutional framework. With the implementation of a series of new trading mechanisms and the launch of the Shanghai-Hong Kong Gold Connect, China’s gold market has become more efficient, standardized, and internationally integrated. Taking 2015 as an example, while the “stock market crash” severely impacted the stability of the national financial market, the gold market saw a significant surge in both the number of participants and trading volumes. By year-end, the number of individual investors reached 86.148 million, an increase of 7.69 million from the 918,500 at the end of 2009—a growth rate of 837.92%. The Shanghai Gold Exchange recorded cumulative gold transactions totaling 34,100 tons, with a transaction value of 8.01 trillion yuan, representing year-on-year increases of 89.58% and 79.42%, respectively. In the first half of 2016, this momentum continued unabated, with cumulative transactions reaching 25,200 tons and a transaction value of 6.51 trillion yuan—increases of 55.49% and 65.89% over the same period last year (data sourced from the “Shanghai Gold Exchange: Analysis Report on Individual Investor Situation in 2015”). This growth trend is unmatched by China’s stock or foreign exchange markets and serves as one piece of evidence demonstrating the enhanced self-reliance and resilience of China’s gold market.

In April 2016, the launch of the “Shanghai Gold” pricing mechanism marked a milestone in China’s gold market. It provided gold investors with a fair and tradable RMB-denominated benchmark price for gold, enriching the range of risk-management and innovative tools based on gold. This not only represented a major step forward for China in gaining international influence over gold pricing but also offered valuable insights for other commodity markets seeking to establish their own international pricing benchmarks. As of the end of September, the centralized pricing trading volume of “Shanghai Gold” had reached a cumulative total of 384.26 tons, with a total transaction value of 105.452 billion yuan. On October 28, the Shanghai Gold Exchange and the Dubai Gold & Commodities Exchange signed the “Shanghai Gold Benchmark Price Authorization and Usage Agreement” in Shanghai, officially launching “Shanghai Gold” into the international financial market. This move has accelerated its internationalization process and will help facilitate the mutual exchange of resource advantages between China and other global financial markets.

Within the national financial market system, looking at the performance of the gold market over the past two years, it can be said that the gold market has stood out remarkably. The relative stability and prosperity of the gold market have helped maintain market confidence and expectations in the nation’s financial system, thereby contributing to the steady development of the financial markets.

Gold consumption continues unabated, absorbing hot money from the market and, to a certain extent, helping to curb inflation. Since 2013, China has surpassed India to become the world’s largest gold consumer for three consecutive years. As shown in the table, although the annual growth rate of jewelry gold consumption—a major component of gold demand—has fluctuated considerably, its upward trend remains strong, reaching 2.02 times the level of 2010 by 2015. Meanwhile, consumption of gold used in industry, small gold bars, and gold coins has experienced both increases and decreases over this period, but since 2015, all three have shown an overall upward trend.

Whether it’s consumer spending or financial investment, gold consumption has absorbed a significant amount of hot money and speculative capital from society. Just during the summer of 2013, Chinese “aunties” rushed to buy 300 tons of gold in just 10 days, with the total value reaching as much as 100 billion yuan. As Chinese residents’ interest in gold consumption continues to grow and their gold-investment mindset keeps evolving, demand for gold jewelry, investment coins, commemorative gold bars, and other gold-based financial products will continue to rise. It can be said that the market’s ability to automatically regulate the supply and demand of credit currency through gold is becoming increasingly evident. This, in turn, can further promote the practice of “keeping gold among the people,” which carries strategic significance.

China’s gold industry is developing rapidly and has become a powerful driving force behind the internationalization of the renminbi and the implementation of the country’s “Belt and Road” initiative. It is actively expanding into overseas markets in areas such as gold mining and gold trading, thereby unlocking domestic capital, technology, and economic potential, helping to prevent a new round of economic fluctuations, and creating a favorable external environment for safeguarding China’s economic development. Currently, China’s gold industry has established a complete industrial chain—from geological exploration and mining to ore processing, smelting, deep processing, and gold market trading—and has risen to the mid-to-high end in many key links of the global gold industry’s resource chain, technology chain, and value chain, transforming from a follower to a leader in the global gold industry.

It is reported that in 2016, several major Chinese gold enterprises—China National Gold Corporation, Zijin Mining Group Co., Ltd., Shandong Gold Group Co., Ltd., Shandong Zhaojin Group Co., Ltd., and Laofengxiang Co., Ltd.—were listed among China's Top 500 Enterprises. The total annual revenue of these five companies amounted to approximately 334.4 billion yuan (with China National Gold generating about 110.7 billion yuan in revenue, Zijin Mining about 74.3 billion yuan, Shandong Gold about 68.2 billion yuan, Shandong Zhaojin about 45.5 billion yuan, and Laofengxiang about 35.7 billion yuan). This clearly demonstrates the significant influence of China’s gold industry within the country. Meanwhile, many gold enterprises and the Shanghai Gold Exchange have actively expanded into overseas markets, establishing a strong presence in foreign mining regions and financial markets across Russia, West Asia, Africa, Australia, and other regions, thus becoming pioneers in implementing the Belt and Road Initiative. By proactively developing overseas resources, Chinese gold enterprises have boosted exports of related labor services, technologies, and equipment, effectively unleashing the long-accumulated potential of domestic markets. At the same time, they have actively fulfilled their social responsibilities, enhanced the nation’s international image, and contributed to the internationalization of the renminbi.

[Highlighting the Role of Gold in Supporting the “Five-Year Plans” and Deepening Market-Oriented Economic Reforms] We believe that the practice of economic development since the founding of New China has demonstrated that implementing the “Five-Year Plans” is a vital key to ensuring the healthy and stable development of our socialist economy. Developing a market-oriented economy is the foundation for enhancing economic efficiency, and gold serves as the safeguarding metal that supports both the “Five-Year Plans” and the market economy.

Under the new normal of the economy, in an increasingly competitive globalized market economy, to achieve stable economic development and social goals through the implementation of the “Five-Year Plan,” we must continue to attach great importance to the role of gold and build and implement a national gold strategy.

The “Five-Year Plan” serves as a roadmap for China’s economic development and social progress over a five-year period. Since the founding of New China, economic cyclical fluctuations have consistently overlapped with and run parallel to the timeframes of the “Five-Year Plans.” To be frank, while the “Five-Year Plan” cannot eliminate economic fluctuations entirely, it undeniably plays a crucial role in moderating and adjusting them, making it one of China’s most valuable tools in economic development. To steer toward the new normal, we must continue to harness the power of the “Five-Year Plan” as we deepen our market-oriented economic reforms. And gold—and the gold industry—undoubtedly play an extremely important supporting role in ensuring the successful implementation of the “Five-Year Plan.”

The development plan for the gold industry is an integral part of the nation’s “Five-Year Plan.” The rapid growth of China’s gold industry is closely linked to the country’s emphasis on gold and the implementation of the “Five-Year Plan.” There is a mutually reinforcing relationship between the development of the gold industry and the nation’s “Five-Year Plan.” Since the reform and opening-up, China’s GDP has maintained double-digit growth for a prolonged period. At the same time, annual gold production has also experienced double-digit growth, with the two showing nearly synchronized rates of increase. Since 2010, as GDP growth has slowed down, so too has annual gold production. With the exception of 2012, when growth exceeded double digits, annual output has declined year after year. In 2015, gold production even recorded a slight negative growth (approximately 340 tons in 2010, about 360 tons in 2011, up roughly 5.9% year-on-year; approximately 403 tons in 2012, up roughly 11.9% year-on-year; about 428 tons in 2013, up roughly 6.2% year-on-year; around 451 tons in 2014, up roughly 5.4% year-on-year; and 450 tons in 2015, down roughly 0.19% year-on-year).

The development of the socialist market economy has spurred the opening up of China’s gold market, boosted the growth of the gold industry, and prompted the state to reassess gold and the gold industry as well as reevaluate the value of gold. After all, even a market economy under strong government intervention can still give rise to economic fluctuations. Gold and the gold industry, too, maintain a mutually reinforcing relationship with the socialist market economy.

In short, the crucial role of gold in national economic fluctuations underscores that, for agricultural, industrialized, and even post-industrial nations, as long as economic fluctuations persist, the role of gold must be harnessed. And economic fluctuations have, to date, become the norm across all types of global economic systems. Consequently, the function of gold has also become normalized. Therefore, from the perspective of national economic security, formulating and implementing a national gold strategy is an inevitable necessity.