POLITICAL ECONOMY

Is China heading to match the U.S. gold reserve level?

The LBMA's chairman at its annual conference in Hong Kong, has appeared to intimate that China is indeed building, or at least likely to build substantially, the proportion of gold in its forex reserves.

Author: Lawrence Williams
Posted: Monday , 12 Nov 2012

LONDON (Mineweb) - 

Surely the biggest non-news gold story of the day was the statement by David Gornall of Natixis, the London Bullion Market Association's Chjairman, that gold is somewhat underrepresented in terms of the percentage of it held in China's foreign reserves.  ""When comparing China to the U.S., it would seem that in China, gold asset allocation can only go in one direction," Gornall told the Association's annual conference being held this year in Hong Kong. "The country has only 2 percent of its reserves in the form of gold compared with the U.S. at 75 percent."

That this fact has been self evident since China last announced a 76% increase in its gold reserve back in 2009 to bring its gold holdings up to all of 1.8% of its foreign reserve holdings doesn't seem to have impacted the media reporting on this statement as seemingly something new.  With the U.S. and a number of European countries holding more than 70% of their forex reserves in gold it has long been felt that China is likely to be moving to increase its holdings of the yellow metal - although to bring it up to the kind of percentage of foreign reserves of the U.S. or Germany could be difficult to do in any kind of orderly market except over a prolonged period of time.

The implication of Gornall's comment, of course, is that China is not only looking to increase the proportion of its reserves held in gold, but that it may already be doing so without reporting it - a position often noted by Mineweb in the past, but seldom acceded to by gold's establishment.  Given that it took China six years before it made any announcement of its last gold reserve rise back in 2009, and admitted at the time that this increase had been built up over the previous period, but put into a state account which it did not feel it necessary to report, has led many gold analysts to assume that the country has been doing the same again, and quietly accumulating gold, but without announcing it in its ‘official' reserve figures.  Indeed, given that China is currently the world's largest gold producer, and has been since 2007, and that its announced gold imports have been rising substantially year on year - and that it does not export any of its gold, the odds are that it is indeed building its gold reserves, and will announce an increase when, and only when, it feels it is opportune to do so.

What this build-up will be is the source of much speculation - anything from zero to 500 or 1,000  or 5,000 tonnes or more has been suggested.  Given the country's annual gold output is getting on for 370 tonnes, and imports have been estimated by the World Gold Council as likely to reach 860 tonnes this year making China the world's largest gold importer, and overtaking India, any of these figures could be correct, or could indeed be understating the case!  The actual level will depend on exactly how much is being consumed by the Chinese general public which has had a substantial appetite for gold jewellery, ornamentation and investment since the ban on holding gold was relaxed a few years back.  Indeed, China seems keen on promoting gold to its population as a strong investment and thus has an interest in not seeing the gold price drop substantially, giving rise to the impression that the country is buying on dips and is effectively mitigating any serious price downside.

However, if China is indeed building up its own gold reserves, but not reporting this, it has an interest also in keeping the lid on prices rising too far too fast as well.  It surely recognises that any announcement of a doubling of its gold reserves or more will have a strong upwards impact on the gold price, whereas a small increase - or a definitive announcement that it is not buying for reserves - would probably depress the price.  Currently it is playing the non-committal game by not commenting on its reserve position, nor announcing any change in it - thus if it does, within the next few years, make an announcement on a new gold reserve level there's no guarantee that this will actually be a true reflection of the actual holding, but just what China wants the rest of the world to think its reserve level is.

With China's almost certain intention to make the yuan ultimately a world reserve currency, either alongside the U.S. dollar - or replacing it if the value of the latter plunges as some suspect it may - then a really big jump in its gold reserve to say 8,000 tonnes or more to at least match that of the U.S. in size, if not in percentage of foreign reserves, could go a long way to cementing this kind of position on the global trading stage. At current annual production and import levels, between them reaching around 1250 tonnes, and rising, this could be achievable in a far shorter time than many have anticipated. 

iPad Version: Picture - REUTERS/Claro Cortes