By Valentin Schmid
Usually the International Monetary Fund only becomes exciting when it tries to prevent Argentina or Greece from defaulting. After five years of hibernation, another, more obscure area of the financial institution might actually shed light on a mystery of global finance: China's gold reserves.
Given their usual knack for non-transparency, the Chinese haven't updated their official gold reserve since 2009, when they stood at 1,054 metric tons, far below the United States, the IMF itself, and European nations such as Germany, France, and Italy.
Beijing has been accumulating more gold since 2009, with estimates ranging from 3,000 to as many as 10,000 tons. As a comparison, the United States holds 8,133 tons as monetary reserves.
"There is a lot of evidence to suggest there has been buying. We are getting reports from many people in the trade, saying they are shipping a lot into China," says Ian MacDonald, chairman of Gold Frontiers, a trading platform for physical gold. "I know that one U.S. company alone shipped 40 metric tons to China last year."
China is also confiscating all of its 500-600 ton yearly production of gold and importing hundreds of tons through Hong Kong. Total demand from the private sector (jewellry, investment, and industrial) alone, however, is double that number at 1,200 tons annually, according to the World Gold Council. Nobody knows how much gold actually ends up in official reserves with the central bank.
Why are Chinese gold reserves important for international finance and what does the IMF have to do with them?
Maybe Beijing believes in the satirical version of the Golden Rule: "Whoever has the gold, makes the rules."
"Whoever has the most gold is able to control gold's valuation. Controlling gold's valuation, you can control the valuation of all other currencies," says Chris Powell of the Gold Anti-Trust Action Committee, a non-profit organization monitoring gold markets.
Henry Kissinger himself believed in that theory when he was Secretary of State in the 1970s. "I am sure the Chinese are well aware of this," says Powell.
Claudio Grass of Global Gold AG in Switzerland agrees that this was certainly true in the past: "One of the reasons the United States became the reserve currency is because they accumulated 70 percent of the gold reserves of the free world after WWII. By the end of the 1940s, the United States had 22,000 tons stored [in the country]," he says.
The public may soon find out how much gold, or power, the Chinese really have.
The IMF is conducting a technical review of its own reserve currency, the so called Special Drawing Right (NYSE:SDR) this year. So far, only the dollar, the euro, the yen, and the pound were part of the SDR. This year, Beijing has indicated it wants the yuan to be included in the SDR.
"That's when they are going to have to come clean. If they are trying to get their currency to become part of the SDR, they would have to come out publicly and say how much is going to be held," says Willie McLucas of McLucas Family Holdings and veteran of the global gold trade.
Most people think the disclosure of gold reserves is part and parcel of becoming part of the SDRs, however, nothing official has been published on the matter.
The international community, however, is taking China's endeavor seriously, as there was a meeting by the global central banks in Washington on April 17, 2015, called "Gold, the Renminbi and the Multicurrency Reserve System." We could see official statements coming at an IMF hearing in May or during the formal SDR revision later this fall.
If China is successful with its application, we could see an increase in its voting rights at the IMF and more influence on the international stage. So far, China only holds 3.81 percent of IMF votes, compared to the United States' 16.75 percent.
Either way, an inclusion into the SDR will give China more clout on the international scene and is a further step towards the internationalization of the yuan.
Whatever China's ultimate plan is after it comes out with a number and becomes part of the SDR, it might have to buy even more gold in the future.
"The more gold China has, the less it's under the thumb of the United States. China has got all of its foreign exchange in U.S. government bonds that could be repudiated in a minute," says Powell. McLucas says it's also important that China stores most of its gold onshore, and not in London and New York.
As of this moment, most Western countries have around 70 percent of their foreign exchange reserves in gold, mostly stored in London, New York, Zurich, and Paris.
As Powell indicates, China has most of its $4.4 trillion in foreign exchange reserve in dollars. If the world really wants to move away from the dollar as a reserve currency, the yuan at this moment doesn't qualify because it is backed mostly by U.S. dollar assets.
Gold could solve that problem. However, if China wants to get up to 70 percent, like other players, it would have to buy another 79,000 tons at a price of $1,200 per ounce - an impossible feat without driving the price through the stratosphere, something fans of the yellow metal have been looking forward to for a long time.
Chris Powell, however, urges gold investors to watch out: "They are not going to pursue a policy with the objective of pleasing Western gold bugs."