China’s Gold to Come to Light After Six Years of Mystery?

by Laurynas Vegys, Casey Research

How much gold does China have in its stash of reserves? Now that’s a million dollar question. Or a “million ounce” question. It may be answered by this autumn, according to a recent report from Bloomberg.

Why all the secrecy?

China hasn’t published its gold reserves since 2009 when it had 1,054 metric tons. We know for a fact that China has been stockpiling gold for many years. The problem is that analysts disagree on what Chinese demand for gold really is.

For example, was China or India the world’s #1 gold consumer in 2014? World Gold Council (WGC) figures say it was India, at 843 metric tons. China only clocked in at 814 metric tons. Most media outlets agree.

However, Gold Fields Mineral Services (GFMS) still puts China in the #1 spot, consuming 895 metric tons of gold in 2014. GMFS, as respected as the WGC, put India’s gold 2014 demand at 852 metric tons.

A big problem with both WGC and GFMS calculations: they define Chinese consumption as jewelry and investment demand. That excludes gold held by China’s commercial banks.

This hasn’t gone unnoticed. China gold expert, Koos Jansen says that Shanghai Gold Exchange (SGE) delivery figures provide a more accurate picture. Below is a look at physical deliveries from the SGE, the COMEX and global mine production.

Three things immediately jump out:

  • Gold deliveries at the SGE are rising… fast.
  • SGE deliveries dwarf those at the COMEX.
  • SGE deliveries are closing on global mine supply.

SGE delivered 2,102 metric tons of gold in 2014. That was slightly below the 2,181 figure in 2013. That’s just a blip (-3.6%) given the multi-year upward charge. And it looks like it won’t last: SGE deliveries already reached around 620 metric tons last quarter. That’s a 10% increase over Q114.

The SGE figures are more comprehensive, but many analysts are skeptical that they accurately represent Chinese demand. Some say that recycled gold could double or even triple the SGE figure. Unfortunately, skeptics provide no details on the amount of recycled gold in SGE deliveries.

Be that as it may, the big difference between SGE’s figures and those reported by WGC and GFMC tell us that many analysts have adopted a limited view of actual Chinese demand. They also miss the big picture.

Why is this important?

Here’s why.

China became the world’s second-largest economy in 2010. Since then, it’s been hard at work to position its currency, the renminbi, as a competitor to the US dollar. China has teamed up with Russia and others to bypass the dollar in trade settlement, through currency swaps, a rival credit rating agency, and other measures.

China’s primary objective is to transform the renminbi into a global reserve currency. This would be the ultimate step in de-dollarizing its economy.

Enter gold.

The Chinese realize that the renminbi has zero chance of ever becoming a reserve currency while it’s pegged to the greenback. So they’ve been working behind the scenes to enhance the credibility of the renminbi by loading up on other assets, including gold: Lots of it. Bloomberg Intelligence says that the People’s Bank of China may have tripled its holdings to 3,510 metric tons since 2009. That’s a hoard second only to the US’ 8,133.5 tonnes of gold.

The secrecy over China’s gold reserves may end sooner than most expect. China is trying to get the renminbi added to the International Monetary Fund’s currency basket (Special Drawing Rights, SRDs).  The SDR basket consists of the US dollar, euro, yen, and British pound. The IMF reviews the basket allocation every five years, and 2015 is a review year. China may come clean on its gold holdings any time before the IMF meeting next October in an effort to show the soundness of the renminbi.

News of bigger than expected China gold reserves could signal the importance of gold as a reserve asset. That would significantly boost market sentiment, and demand for gold.

At Casey Research, we stack the odds in our favor by using our knowledge of powerful market trends. One of these trends has been the massive flow of gold from West to East—a result of China’s insatiable appetite for the yellow metal. We invite you to learn how to make the most of this opportunity by reading the new issue of BIG GOLD.

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