Enter the Dragon. China’s push to challenge U.S. dominance as the global economic superpower and to challenge the dollar as a global reserve currency involves gold – “a lot of gold.”
China may soon make public that it has quietly accumulated a massive hoard of gold in recent years. This was done in order to bolster their bid to have the yuan included in the basket of currencies that make up the IMF’s Special Drawing Rights (SDRs) according to an article by Bloomberg.
This is something Jim Rickards, ourselves and many analysts in the gold sector have said would happen for some time. The People’s Bank of China’s (PBOC) quiet ongoing accumulation of gold is something we frequently cover as we believe it is an important demand factor in the market that is largely ignored by most analysts and in most coverage of the gold market.
Officially Reported Gold Holdings (Not Including People’s Bank of China) – Wikipedia
Currently the SDR is composed of dollars, euros, yen and sterling. It is further testimony to the new emerging order that the yuan is under consideration even as it establishes the AIIB which looks set to rival the IMF and World Bank.
China has not publicised its gold holdings since April 2009 when their holdings doubled to 1,054 metric tonnes. The announcement surprised most market participants at the time and was likely a factor in the higher gold price seen in 2009.
Bloomberg speculates that the PBOC may have increased its gold reserves three-fold since that time to over 3,000 metric tonnes.
“The People’s Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tons”, says Bloomberg Intelligence, based on trade data, domestic output and China Gold Association figures.
China would therefore have the third largest gold reserves in the world – second only to the U.S. and Germany.
It is worth noting that the U.S. refuses to allow their gold reserves to be publicly audited and the Bundesbank is having difficulty repatriating much of its gold stored with the Federal Reserve. This has led many analysts to speculate that the U.S.’s gold reserves have been leased out or sold or are encumbered as part of an ongoing effort to manipulate gold prices.
Analysts who closely follow the gold market, believe that Chinese reserve holdings may be much higher. Shanghai and the SGE has superseded Hong Kong to become a major hub for trading in physical gold not just in Asia but globally.
It seems likely that the Chinese government have been accumulating gold by stealth using proxies in Shanghai.
China’s ambition to make the yuan a dominant, if not the dominant reserve currency is now beyond dispute. However, they have a long way to go yet. The IMF estimates that the dollar and the euro together currently make up 85% of global reserves.
If their IMF ambitions do force them to disclose their gold holdings it does not follow that they will make public their entire reserves unless they deem it politically expedient to do so.
So Bloomberg Intelligence estimates of China’s reserves may be accurate but they may be significantly understated.
This is unlikely, however. The secrecy with which China operates with regards to gold demonstrates the strategic importance that they, like Russia, place on gold.
Bloomberg reports,”In a rare comment on gold, Yi Gang, the central bank’s deputy governor, said in March 2013 that the country could only invest as much as 2 percent of its foreign-exchange holdings in gold because the market was too small.”
Elsewhere, Bloomberg reports that China’s foreign reserves “have surged more than fivefold in a decade and are the biggest in the world.”
Central banks globally are expected to add another 400 tonnes to their reserves this year indicating a degree of distrust in the current monetary order by the very entities that issue fiat currencies.
The Dragon’s Gold Hoard
It is almost certain that the People’s Bank of China (PBOC) is accumulating more gold than they are declaring publicly and indeed officially to the IMF.
It is interesting as the PBOC is the only major central bank that has not been transparent with regard to gold reserves, even Russia has declared their gold purchases.
(As a side, one should note that there is little reason why Russia may not adopt the Chinese practice of not being transparent in this regard in the coming years given the deterioration in relations with the West.)
The Chinese government have been surreptitiously accumulating vast quantities of the precious metal in recent years and there is no reason to believe this buying will end in the coming months as geopolitical and monetary risks remain.
And yet this buying and the presence of the PBOC in the gold market is notably absent from most analysis about gold.
Figures from the Shanghai Gold Exchange (SGE) – which has overtaken Hong Kong as China’s main gold hub and which only deals in physical gold – suggest that some of the very high withdrawals may be going to the PBOC’s gold hoard.
This year has seen very high volumes passing through the SGE again. Last quarter alone, SGE withdrawals were a new record high at 623 metric tonnes.
It is likely that the PBOC accumulated some of these sizeable withdrawals.
It is worth noting that the PBOC’s gold reserves remain small when compared to those of the U.S. and indebted European nations. They are miniscule when compared with China’s massive foreign exchange reserves of more than $3 trillion.
The PBOC is almost certainly continuing to quietly accumulate gold bullion reserves. As was the case previously, they will not announce their gold bullion purchases to the market in order to ensure they accumulate sizeable reserves at more competitive prices.
They also do not wish to create a run on the dollar – thereby devaluing their sizeable reserves.
Based on the huge gold withdrawals seen on the SGE in recent years, we would not be surprised to see an announcement from the PBOC, sometime later in 2015 or in 2016, that they have more than quadrupled their reserves to over 4,000 metric tonnes.
However, speculation regarding the amount of an increase is far less important than the salient fact that there is a large ongoing buyer of gold in the market that is unacknowledged and most participants are aware of.
Total official central bank demand continues at roughly 100 tonnes every single quarter.
However, this does not include the ongoing clandestine and undeclared purchases by the PBOC. Conservative estimates put PBOC demand at 100 tonnes a quarter or at over 400 tonnes for the year. More radical projections are of demand of over 1,000 tonnes from the PBOC in recent years.
Only time will tell but awareness of this demand and the announcement itself are an important reason that we remain unashamedly bullish on gold.