Chinese Central Bank Gold Buying Is Back

| About: SPDR Gold (GLD)

After a buying hiatus in May, which had caused us to reconsider the overall volume of central bank gold buying this year, the People's Bank of China has reported adding 15 tonnes of gold to its reserves in June. This has been the largest monthly addition to its gold reserves since January this year and interestingly coincides with a big rise in the gold price, although the gold will mostly have been added when prices were well below the latest peaks. It also coincides with a significant weakening of the Yuan against the U.S. dollar. China seems to have used the Brexit vote, and the subsequent rise in the Dollar Index, to allow its currency to decline in value thus making its goods ever more competitive in global markets. It has also meant an even bigger price rise for gold in the domestic currency than in the dollar.

According to IMF statistics, the Chinese and Russian central banks have been the only really major purchasers of gold on a regular basis over the past few years, followed perhaps by Kazakhstan at a somewhat lower level. In May, China did not increase its stated gold reserves at all and Russia only added 3 tonnes leading to fears that central bank buying was going to take a major dip this year. The latest Chinese announcement will allay these fears to an extent, although Russia's next monthly announcement will be significant in this respect too.

Overall now China's officially reported gold reserves sit at around 1,823 tonnes, but its true gold holdings are still a cause for some debate with some analysts convinced that the true figure is far higher, with more gold being held in non-reported accounts. There is also an opinion that gold held in the commercial banking system in China is also being held on behalf of the government given that the commercial banks are ultimately state owned and controlled. These gold holdings are extensive and have been estimated to be at around 2,500 tonnes or more - officially to be used as collateral in certain financial transactions.

While a monthly purchase of 15 tonnes of gold might be considered as important in terms of China's continued diversification of assets away from its U.S. dollar related holdings, it only accounts for around half a percent of global gold production, and pales into insignificance in relation to the rise in ETF gold holdings this year of around 500 tonnes plus.