China Prepares to Transform the Gold Market

 |  Includes: FXI, GLD
by: Peter Cooper

The inscrutable Chinese are hardly likely to inform the world that they are on a gold buying spree for fear of sending the gold price through the roof before they can finished their acquisition plans.

China’s gold reserves amount to 1,054 tons, ranking fifth in the world, said Yi Gang, central bank vice governor on Tuesday. China is the largest gold producer in the world, with more than 300 tons of gold produced annually, all of it consumed locally and not exported.

Private gold reserves

China is the second largest gold consumer in the world, with a consumption of over 400 tons of gold a year, second only to India. And it has been conservatively estimated that there are far more than 3,000 tons of gold accumulated among Chinese people.

Indeed it was only at the start of last year that China suddenly announced to the IMF that it had doubled its official gold reserves to 1,054 tons from 2003. Nobody knew anything about it before then, although there must have been suspicions in the trade.

Ah but let me run that past sharp readers again. Yesterday the Chinese central bank announced gold reserves of 1,054 tons, exactly the same figure as it gave the IMF a year ago. Is that not suspicious? When will we see the true figure including whatever they bought last year?

‘Gold is not a bad asset but currently a few factors limit our ability to increase foreign-exchange investment in gold,’ Mr Gang, also director of China’s State Administration of Foreign Exchange, told a news conference during the National People’s Congress.

He went onto explain that the supply of gold was too limited for the precious metal to play a major role in currencies, and that if China bought too much the price would go up.

Accumulating gold

But China should be judged on its record and not its rhetoric. In 2006 the World Gold Council said its central bank held 600 tons and had doubled its reserves to this level at the time when the UK was selling its gold reserves.

China has clearly been increasing its gold reserves steadily for a decade and has benefited from the quadrupling of gold prices over that period. But never mind the central bank, surely the surging private gold and silver holdings are the thing to watch.

When a population of 1.5 billion, Chinese become gold bugs then $5,000 an ounce gold will be seen as far too conservative as a forecast.

Disclosure: Author is long precious metals