Currencies, Frontier Markets, Metals

After Six Years Of Secrecy, China Has Released Questionable Gold Reserve Figures

China Gold1After six years of mystery over how much gold China is actually hoarding, the nation surprised the bullion market on Friday by unveiling its first reserve figures since last published in April 2009, which showed a near 60 percent jump versus expectations that holdings had tripled since that time.

China has boosted bullion assets to 53.31 million troy ounces, or approximately 1,658 metric tons (valued at over $60 billion at today’s prices), China’s Central Bank, the People’s Bank of China said in a statement Friday.

That’s up from 1,054 tons in 2009, an increase of 604 tons (valued at $21.964 billion at today’s prices), or an increase of 57 percent.

With the newly released figures, China has now overtaken Russia to become the world’s sixth largest official sector gold holder after the U.S., Germany, the International Monetary Fund (IMF), Italy, and France.

The U.S. has the largest gold reserves at 8,133.5 tons, according to data from the World Gold Council.

Chart courtesy of The World Gold Council, June 2015.

Chart courtesy of The World Gold Council, June 2015.

The move by China comes amid a push for the nation’s currency to be included in the IMF’s Special Drawing Rights (SDR) basket — currently made up of dollars, yen, pounds, and euros — which requires the disclosure of the nation’s gold holdings.  A meeting with the IMF on the SDR composition may be held in October.

A WikiLeaks cable in 2009 cited a Chinese newspaper as saying that Europe and the U.S. didn’t want to see other countries turning to gold reserves instead of the dollar or euro, China’s increased gold reserves will act as a model and lead other countries towards reserving more gold, and that China’s large gold reserves would be beneficial in promoting the internationalization of the Chinese currency.

“China increases its gold reserves in order to kill two birds with one stone”

The China Radio International sponsored newspaper World News Journal (Shijie Xinwenbao)(04/28):

“According to China’s National Foreign Exchanges Administration China ‘s gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.”

Standard Chartered estimated in May that around $1 trillion in global currency reserves could switch into Chinese assets should the IMF endorse the yuan as a reserve currency and include it in its SDR basket this year.

The reserve figures released by China comes as gold futures fell for a seventh straight session on Friday to the lowest level in over five years.

But China’s newly released figure of its gold holdings are being question, and rightfully so, as Zero Hedge points out that China’s gold reserves have been fixed at 33.89 million oz since April 2009, a little over 1,000 tons. In other words, the PBOC’s gold inventory has been “unchanged” for over 6 years which is in stark contrast to the ravenous buying of physical gold China has been engaging in for the past 5 years.

Image courtesy of the PBOC.

Image courtesy of the PBOC.

China finally admitted that it had been misrepresenting its gold holdings for a very long time, when it announced that its gold holdings had increased from 38.89 million to 53.31 million troy ounces, a 57% increase “in one month.”

China’s new gold reserve figures are well below official expectations as Bloomberg Intelligence actually estimated that Beijing’s gold reserves were above 3,000 metric tons in April.

The People’s Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tons, says Bloomberg Intelligence, based on trade data, domestic output and China Gold Association figures. A stockpile that big would be second only to the 8,133.5 tons in the U.S.

“There has been ongoing market chatter that China had been amassing gold, and that had gained more importance ahead of October, when the Chinese want to be included in the SDR. It was felt by many that they would be more open, and that would mean revealing any increase in their reserves,” Societe Generale analyst Robin Bhar told Reuters.

“This (figure) was not unexpected. If anything, it was slightly surprising that it wasn’t more,” Bhar added. “The market was looking at a figure north of 2,000 tonnes.”

“The figure published by the PBOC is roughly half the market consensus on what we had thought they had accumulated,” Ross Norman, Chief Executive of London-based bullion broker Sharps Pixley told The Wall Street Journal. “The interesting thing about the announcement is the timing. China has clear ambitions to create a global reserve currency to challenge the hegemony of the U.S. dollar and to fill the void created by the declining holdings by central banks of the euro.”

Despite the increase in its holdings, gold now accounts for 1.65 percent of China’s total forex reserves, which are the world’s largest at more than $3 trillion.

The U.S. — the biggest official sector gold holder — holds 74 percent of its reserves in gold, Germany holds 68 percent, Italy holds 67 percent, and France holds 66 percent, according to Reuters.

The world average was just under 10 percent at the end of 2014, according to Reuters GFMS.


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