Last week we brought you a window into China’s geostrategic endgame: buying up as much of the world as it can get out of its dollars. Now thanks to Wikileaks we have an insight into where China is going monetarily: a gold-backed yuan.

From Wikileaks:

“According to China’s National Foreign Exchanges Administration China ‘s gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.”

The real question is what this development (it can hardly be called a surprise) will have on the price of gold in the short-to-medium term. Some commentators suggest that it will spur mutual funds and pension funds to significantly increase gold holdings, pushing the price up to almost-astronomical levels.

From Zero Hedge:

Wondering why gold at $1850 is cheap, or why gold at double that price will also be cheap, or frankly at any price? Because, as the following leaked cable explains, gold is, to China at least, nothing but the opportunity cost of destroying the dollar’s reserve status. Putting that into dollar terms is, therefore, impractical at best, and illogical at worst. We have a suspicion that the following cable from the US embassy in China is about to go not viral but very much global, and prompt all those mutual fund managers who are on the golden sidelines to dip a toe in the 24 karat pool. The only thing that matters from China’s perspective is that “suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency.

In my view, the real question is just how willing the Federal Reserve and U.S. Treasury will be to defend their massive gold holdings — after all, selling a big chunk of that “barbarous relic” at a higher price (let’s say $3,000 or $5,000 an ounce) would go some way to paying down that huge crushing weight of fiat debt without having to resort to printing money. Let’s not forget that Bernanke’s mentor, Stanley Fischer the head of the bank of Israel, presides over a central bank with zero gold reserves.