China Fails To Disclose Gold Reserves

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Includes: GLD
by: Katchum

Summary

China just disclosed that it didn't accumulate any gold as of March 2015.

Trade data suggests China has 3510 tonnes of gold reserves.

Gold reserve disclosure is key in inclusion of yuan in SDR.

Gold sees strength on speculation that China will reveal its gold reserves later this year.

After 6 years, China still hasn't disclosed its gold reserves. They just confirmed that today. On the chart below from Bullionstar.com you can see that China disclosed its gold reserves in 2003 and 2009, which is a time interval of 6 years. So I hoped that they would disclose it in April 2015, just before the IMF review of the SDR in May (which is done every 5 years). Gold (NYSEARCA:GLD) didn't react much (up 0.5%) and here is why.

The consensus estimate reported by Bloomberg was 3510 tonnes of Chinese gold reserves, based on import data. If we do the math, this is about 409 tonnes a year or 8 tonnes per week, which is an acceptable estimate as global mine supply is about 50-60 tonnes a week.

However, China just disclosed it hasn't accumulated any gold at all. It now still possesses 1054 tonnes of gold reserves. That result can be found here on PBOC website under the statistics and analysis department page. Under 2015 money and banking statistics.

China is standing at 7th place among top nations like the U.S., Germany, the IMF, Italy and France. See table below from April 2015.

I still believe China has accumulated gold to the amount of around 4000 tonnes and doesn't reveal its gold holdings so that they can accumulate gold at a cheap price. China is definitely buying gold and that can be evidenced from the weekly withdrawal numbers from the Shanghai Gold Exchange. The gold is also coming from the gold ETF's, recycled gold and the Western central bank vaults.

I have tracked how much physical gold has been withdrawn from the top gold ETF's holding physical gold. That chart is given below. Since the top of 2012, about 1000 tonnes has been leaving the vaults, of which 500 tonnes came from the largest ETF: SPDR gold trust . So supply from gold ETF's is one area where the gold is coming from.

Similarly, recycled gold supply amounts to about 1000 tonnes every year. See chart below from the World Gold Council. So supply is coming from that direction too.

And last but not least, gold is coming from the Western central banks that have leased their gold into the market. The evidence can be found in the latest report on U.S. gold bullion exports. Miningweekly reports that the U.S. had an 83% jump in gold bullion exports in Q4 2015 compared to Q3 2015. In 2014, U.S. gold exports were 500 tonnes.

Therefore I believe China doesn't want to disclose how much gold it has and is going to play its joker card some other day. If China were to disclose it later this year, it would have a good chance to include the yuan into the "Special Drawing Rights" (SDR) of the IMF. It all fits into their plan to dethrone the U.S. dollar as the world reserve currency, because the SDR has the most chance to do just that. As of March 2015, the SDR had a valuation of $280 billion. The consequence of inclusion in the SDR is that the yuan will strengthen. China may or may not be in favor of this due to its competitiveness in exports, but it is bound to happen eventually as China is gaining more importance in the world economy.

The SDR which is currently made up of USD 44%, EURO 34% GBP 11%, and YEN 11% - is adjusted every 5 years. The makeup of the SDR basket will be adjusted on 1 January 2016. There will be a meeting to review the weights in May 2015. This will be confirmed in October, 2015. The U.S. dollar will most likely have a bigger share in the SDR, taking into account the current COFER composition. It is even possible that gold will be included, so investors need to be wary about that.

Although the inclusion in the SDR is a very important step for China to take, China on itself is pushing for a currency basket of its own with the Asian Infrastructure Investment Bank (AIIB) which is valued at $100 billion. This currency basket starts with U.S. dollars, but the yuan will be introduced later on.

To summarize, this recent PBOC announcement has confirmed that it didn't accumulate any gold as of March 2015. If China wants to have more saying in the SDR inclusion of the yuan, it will have to disclose its gold holdings later this year. I believe gold's strength will continue on speculation that China will do just that later this year.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.