Australia’s ANZ bank is the latest to open a gold vault in the Singapore Freeport area next to the city state’s Changi airport. Other recent vault builders there include Deutsche Bank and JP Morgan, while Switzerland’s Metalor has one under construction and due to open in a couple of month’s time. Together with new gold vault openings in Hong Kong this is yet another outward sign of the continued flight of gold from West to East, although the vaults are also servicing western precious metals investors seeking safe, and relatively low cost vaulting facilities outside of the traditional depositories in the U.S. and Europe.
Now either the Western bullion banks have misjudged the power that gold still retains in the global psyche and as a key financial instrument, or the Asian investors and governments, which are continuing to accumulate gold at a high rate, have got it wrong. Much is made of the rundown in COMEX gold bullion stocks and the drain of physical gold out of the big ETFs which are fully gold backed and certainly all the figures are telling us that the gold is indeed moving East – it is not only Asian governments which are buying gold, but also countries like Russia, Kazakhstan and Turkey (which falls between the European and Asian blocs) have been accumulating the precious metal and raising their overall gold reserves. They obviously all see gold holdings as a vital factor in any changing world financial order.
The big question in this respect is, of course China. Logic – and the statistics – suggests that China is at the very least buying in its own gold production, which by law has to be sold to the state. As the world’s largest gold producer with output of around 400 tonnes annually, even if this is all it is taking into reserves, this is a very significant amount being around 15% of the world’s newly mined gold. This amount of gold alone would mean that China will have taken around 1,500 tonnes into its reserves since it last reported an upgrade in its holdings to the current official figure of 1,054 tonnes in April 2009. This suggests China’s gold reserves may well have at least more than doubled over the period since then and would put it in fourth place amongst the global gold holders with ca 2,500 tonnes, after the U.S. with official gold holdings of 8,133.5 tonnes, Germany with 3,390.6 tonnes and the IMF with 2,814 tonnes.
Tyler Durden, writing in Zero Hedge picked up on a recent statement by Yao Yudong of the People’s Bank of China monetary Policy Committee calling for a new Bretton Woods type system to strengthen the management of global liquidity – click here to read Durden’s article. In it he suggested that Yao’s statement could be the first salvo in a Chinese push for a new gold standard – or something approaching this – or at least yet another indication that China is moving towards trying to overturn dollar hegemony and make a place for the renminbi in the new global reserve currency – a point we have made on Mineweb in the past. The suggestion is that China may look towards some kind of hard asset backed ‘optionality’ as a future negotiating point in rejigging the world financial order at some point in the future.
Coming back to China’s likely gold holdings, many observers feel that, in addition to taking its own gold output into some kind of separate government account which, in its view it is not obliged to disclose as part of its official reserves until it feels it is politically opportune to do so, it is also buying gold on the open market given the huge volumes of gold pouring into the nation. Even so it would still have a way to go to match the U.S. gold reserves – unless of course the government does a ‘Roosevelt’ and confiscates its citizens’ gold, at which point, in a fell swoop it could perhaps get close to matching the U.S. in total gold holdings. This is something that, in theory, it would be easier to do in a totalitarian state than in a democracy like the U.S. One can be sure that Chinese economists have studied what Roosevelt did and have built it into one of their possible scenarios. one would assume, though, under such a scenario the state would not just confiscate the gold, but pay a ‘reasonable’ price for it. China is not short of monetary resources.
One recalls that China positively encouraged its citizens to buy gold – a cynic might suggest that this was just a route to bringing more and more gold into the country which could then subsequently be used as a de facto reserve.
China might then feel, if it can match, or perhaps exceed, the U.S. in its gold holdings it would be in a position to demand a place in a global reserve currency – or indeed replace the dollar as such with the renminbi and revalue gold to whatever level it sees fit. Pure speculation on our part, of course, but the Chinese have learnt from the capitalist system turning it to their own advantage. As Durden points out in his article, global reserve currencies don’t last forever and the U.S. dollar could be nearing the end of its reign as such.