China's Gold: World Changing or Unsurprising?

"For 5,000 YEARS gold was a monetary asset, a financial asset, and a commodity," noted Jeffrey Christian of the CPM metals consultancy (.pdf) in New York last month. "Since the 1960s gold has been removed as a basis of the international monetary system."

But reviewing last week's news that China's Gold Hoard Rose 75% in the five years to end-2008, CPM now thinks it important that the 454-tonne purchase were initially made by the non-central bank State Administration of Foreign Exchange (SAFE), and only recently transferred to the People's Bank of China (PBOC).

From MineWeb:

CPM analysts believe that the confirmation of the Chinese move to place the gold in its official reserves indicates the extent to which gold is being rehabilitated as a monetary reserve asset, not only by the Chinese monetary authorities but by central bankers around the world.

It suggests that monetary authorities are looking at gold as a monetary asset with greater interest than at any time since the 1960s.

If that's the case, then Europe's big central banks – currently the top hoarders outside the US, and pipping China to spots four, three and two in world gold reserves – don't get it. Not yet at least.

"That China has bought gold doesn't surprise me," says ECB policy-maker Nout Wellink to the Frankfurter Allgemeine Zeitung paper Tuesday. And given how Chinese FX reserves rose six-fold all told to $2 trillion over the same period, shrugging your shoulders seems fair enough. Because as a proportion of foreign reserves, gold barely budged for China to just 1.7%. France, Germany and Italy, by comparison, hold some 70% of their reserves in gold. So they've got it to sell, just as they did 10 years ago when signing the first Central Bank Gold Agreement.

Now China looks keen to buy (albeit at a much slower pace than it's acquiring dollars) Wellink calls the Chinese news "a positive development and I appreciate the move." He also says renewing the CBGA this September is a shoo-in. It's certainly "the path of least resistance" for the big European gold-hoarders, as Philip Klapwijk of the GFMS consultancy put it earlier this month.

But will China really need to go to Europe – or the IMF, as pundits agree of the G20's restatement of its pre-proposed 400-tonne sales – to grow its gold hoard? "China is currently the biggest gold producing nation in the world," notes Dr. Edel Tulley at Mitsui here in London. "[But] the fact that this sale amounted to a purchase of domestic metal [direct from local miners] matters little.

"It all feeds it less supply of metal on the market. And in very simple economics, this should feed into a higher Gold Price."

Basis Virtual Metals' (.pdf) data, that purchase of 454 tonnes equaled more than one-third of China's reported gold mining output (1,230 tonnes) since end-2003. And whatever the politics of announcing this growth in gold reserves at the same time as demanding the end of the Dollar's No.1 Currency Status, that demand makes a sweetly mandated buyer for China's domestic miners.

Disclosure: Long physical gold

Comments

[doubleguns:]

Can we really believe china is telling us the truth. I suspect they are hoarding a lot more than they are telling. If they reported that they had increased gold too much the price would go through the roof and they would have to pay a lot more for any gold bought from the IMF or any other big sale of gold.

They would appear to be getting tired of having dollars in reserve and fear the devaluation of the dollar as much as anyone. Could it be that they wanted to send a message to America that they do not have to hold our treasuries since they now have some gold and this was some subtle threat or message. I think we had better pay attention. What will happen when next year they report they have aquired an additional 1000 tonnes. Most of which they probably already have stored in vaults just not reported.

Apr 29 04:49 AM

[iknoknot:]

why would china announce this?

to pressure the US to be responsible, for one...

to run up the price before dumping some? Certainly not in preparation to buy.

further endorsement of the gold standard (look world, we have lots too!)

or just to see what would happen (even if not true?) in the game.

--ikk

Apr 29 05:18 AM

[nobby73:]

Completely overstating the issue. The increase in China's gold reserves from end of 2003 to end of 2008 was about the same as the increase in holdings in gold ETFs in Q1 2009. As the author says, the increase in gold is actually only a slight change in the proportion of reserves. So, that means they have been hoarding

Holding gold is about being bearish currencies, Dollar, Euro, Yen, Sterling, Swiss Franc - all of them seem to be trying to be the ugliest beast in an ugly pig competition.

Apr 29 08:09 AM

[Paul Harper:]

not only being bearish on currencies, also supporting gold producers in your own country & not trading the international market ... I see the Chinese stance as being a very bearish hedge on the $ in particular

Apr 29 09:03 AM

[auto44:]

Since China is now the worlds largest producer of gold it is probably in therir intrest to keep the price of gold up. One way is to take some domestic production off the table and hoard it in their central bank reducing supply. Another is to announce to the world that they are hoarding incresing demand. With that said as most of us here believe, what better investment could they add at a reasonable rate to their portfolio. I guess they think as most of us do that having some of your long term assets in gold is a good idea at this point in time. Alos it doeswn't cost them much since they are buying with their own currency which they can just print and probably did.

Apr 29 09:12 AM

[Vuke:]

The Theory of Rational Expectations suggests Central Banks have to be circumspect in what they reveal. Enough has come from Chinese statements to know they place some emphasis on gold.

What is not known is their future plan, nor the amount of gold accumulated by state directed entities but, given their statements on currency concerns putting both together would suggest they are indeed accumulating gold.

It would look altogether odd if they said nothing, thus leading to speculative excess, so this recent statement is just enough to both allay concern and damp prices. A very neat mix of information and disinformation that suggests buyers of gold should have no concern about falling prices. Gold is going much higher, in a well managed way.

Apr 29 11:53 AM

[yellowhoard:]

China is clearly on its way to becoming the world's next reserve currency.

Massive accumulation of gold is to be expected.

Apr 29 06:06 PM

[weskus:]

I agree 100% ..


On Apr 29 09:03 AM Paul Harper wrote:

> not only being bearish on currencies, also supporting gold producers
> in your own country & not trading the international market ...
> I see the Chinese stance as being a very bearish hedge on the $ in
> particular

Apr 30 02:50 AM

[rbblum:]

Another way to put things into perspective is to picture what it would be like if all the global market participants were seated at the grand economic table and observe what each participant really had to contribute/articulate concerning their current position within the global economic sphere.

The USA would continue to meddle with best practices of business interests, advancing the backwardation of social engineering and, recklessly abandoning rational and prudent fiscal/monetary policies. China on the other hand will continue to plod ahead one step at a time as it has one century at a time: currently buying, investing/partnering in real asset-based businesses, engraciating overly-leveraged global participants with short-sighted loans, and planning their (China) future by laying the groundwork of future fininacial/monetary strength.

Apr 30 02:41 PM

[Freya:]

Why is Gold a necessary requisite for qualification as a World reserve currency?

Besides, China has been calling for an SDR basket to replace the USD. At this point, all they want to do is gain more internal equilibrium, internal consumption versus exports. Being labelled a World Reserve Currency would prevent them from controlling the Yuan.

Maybe in 3-5 years, they might allow the Yuan to float freely. But not until they ween themselves away from being totally dependent on exports.

Apr 30 05:11 PM

[Freya:]

You can read it as the Chinese are hoarding Gold or as the Chinese are supporting their home grown industry. Why the Chinese would be selling gold is beyond my comprehension. They do not export oil, why would they export gold?

On a purely Contrarian Basis, maybe they are informing the World how much they have to contribute to the IMF's Gold Sales.

You can debate the matter til you are Blue, but until China does actually purchase Gold on the Open Market, what their actual intent may be is Inscrutable.

Apr 29 10:51 AM