Ever since China legalised private gold investment in 2002, the country, and its citizens’ gold demand has been growing every year. In part, this is because gold is built into the Chinese psyche as a safe store of wealth and as an inflation protector, but it also recognises the continuing growth in the Chinese middle class and its steadily accumulating wealth. As Mineweb pointed out earlier this week, September was the fifth month in a row, and the sixth month this year, that China’s net imports of gold via Hong Kong, exceeded 100 tonnes. Indeed, China seems set to import more than 1,000 tonnes of gold via this route this year, almost certainly seeing it surpass India as the world’s No. 1 gold consumer.
Nichols notes that, in recent years, China’s central bank, the People’s Bank of China (PBOC), has very likely also been a significant buyer of gold. A few years ago, in April 2009, the PBOC revealed it had purchased some 454 tonnes (about 14.6 million ounces) over the preceding six years, almost doubling its gold reserves at a stroke. Since then, Nichols says, there has been no official data or hard evidence of additional acquisitions - but he believes the central bank has continued buying regularly from domestic mine production and scrap refinery output perhaps as much as 50 to 100 tonnes or more each year. For its part, the PBOC has said it will “seek diversification in the management of reserve assets,” thus discreetly signalling its intention to accumulate gold.
Indeed this is a conservative estimate in relation to that of many other China followers who reckon the PBOC’s unstated gold accumulation could be as much as 500 tonnes or more per year in a plan to build gold reserves rapidly to make it one of the top three holders of gold in the world – perhaps surpassing World No. 2 Germany’s 3,390 tonnes or even, over time, challenging the U.S. position as the world’s dominant holder of gold with its reported, but not audited, 8,000 tonnes plus.
With China itself currently producing over 400 tonnes of gold annually, and likely importing well over 1,000 tonnes from elsewhere, but exporting virtually none, it could perhaps not take very long to achieve gold reserve dominance depending on how much of the country’s imports plus domestic production is actually going into private hands and how much may be being taken in to an unstated government account which is not being reported as being part of the nation’s reserves.
Nichols comments that fuelling the PBOC’s interest in building its official gold holdings is its expectation that the U.S. dollar will depreciate against the Chinese yuan and other “strong” currencies in years to come as the dollar’s status and role as the world’s primary official reserve asset gradually diminishes – presumably not least from the debilitation of currency purchasing power through the continuing Quantitative Easing programmes.
At the same time, Nichols avers, the PBOC envisions the yuan will enjoy growing stature as an official reserve and trade settlement currency - and it believes ownership of gold will enhance its currency’s future stature and prestige. Some of this process is already occurring with bilateral trade deals between China and other countries taking place in yuan, rather than the dollar and, ultimately, China could be looking for the yuan to replace the dollar as the worlds’ global reserve currency – or at least be a major player in a more broad based reserve currency system.
The gold price has been moving more or less contrary to many expectations over the past two years with what might be seen as normally gold-positive events briefly driving the gold price upwards, but then massive sales of paper gold in the futures market almost immediately driving the price down again.
The latest such event was yesterday when an unexpected ECB interest rate cut was announced, causing gold to spike upwards, but immediately followed by heavy sales which knocked it back around $25. This kind of activity is happening with ever increasing frequency, not surprisingly leading gold price proponents to cry foul. There is a strong feeling that the global financial establishment is doing everything it can to suppress gold prices, thereby trying to maintain the pretence that all is well with global currencies.
Meanwhile, the Chinese keep on buying regardless. Presumably they see gold price weakness as an opportunity to build holdings assessing that longer term the suppression – if indeed that is what it is – will run out of steam and gold will find a level considerably higher than it is today.
The theory that China is surreptitiously moving gold into its reserves without reporting this to the IMF has also gained credence with former Executive Chairman of GFMS, Philip Klapwijk, now a Hong Kong based precious metals consultant, reckoning that China may have absorbed some 300 tonnes of gold in the first half of this year. Klapwijk is quoted by Bloomberg as saying “The probability is that there’s some form of official purchases that have not yet been reflected in the monetary gold reserves”. He went on to say “Purchases since end-2008 could be quite substantial, especially in calendar 2013 to date. It remains to be seen if China will decide at some point to reposition some or all of this bullion in the monetary reserves and publish a new figure for its official gold holdings.” Klapwijk reckons the overall level of Chinese demand for the yellow metal has been price supportive, without which current gold prices could be quite a bit lower.
Nichols maintains, however, that China’s actual gold-mine production, secondary supply from old jewellery and industrial scrap, jewellery consumption, investment, imports and central bank purchases have each been more than indicated by the available statistics or generally believed by analysts of the gold scene. And the gold that goes into China stays in China! If he is correct then China’s gold consumption could be far higher than others believe which could mean Klapwijk’s estimates of what is probably being retained into unreported reserves could well be on the low side. There is too the strong belief that the Hong Kong import data does not present the whole picture of Chinese gold imports. Mainland China does not report gold import statistics. If these suppositions are correct then Chinese gold reserves could be being built up at a much faster rate than anyone has surmised.
If those who believe China is building reserves without reporting them to the IMF are correct, then the gold price is very much in China’s hands. Once it has grown reserves to the desired level, and if it suits the politicians to do so, then the country could announce this to the world which would undoubtedly hugely affect the price.
But regardless of all this, massive recent Chinese gold demand will certainly have lent a huge degree of support to the gold price, more than countering sales out of the Western ETFs, and soaking up most new mine production on its own – and there’s little sign of this demand slowing down.
Nichols thus reckons in his commentary that China’s ‘insatiable appetite, for gold can, single-handedly, lift the price to new record highs, although gives no timescale for this to happen.
REUTERS/Stringer China
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