Is China accumulating gold reserves?

With gold prices rising, there is a lot of speculation from Chinese investors that the Chinese government is going to accumulate the metal in the coming months. Traders say that is China does plan on accumulating more gold, they are going to do it in complete secrecy over the next few years.

08 September 2011 at 15:45 IST
Commodity Online

BEIJING (Commodity Online): Even as Gold prices continue to rise, there is mounting speculation among traders in China that the Chinese government is going to accumulate the yellow metal in the coming months.

Recently, there have been comments from China Gold Investment Research Institute that the People’s Bank of China is stepping up plans to buy gold to increase its foreign exchange reserves in the yellow metal.

Currently, China holds only minor proportion of its official foreign exchange reserves in gold--just 1.6%.

But traders say if China is going to accumulate gold, it is going to do it in complete secrecy that no one would know about it in the next few years that the People’s Bank of China had actually added up the gold reserves.

The first time China officially reported its gold reserves was in 2003. It then reported the existence of 600 tons of gold reserves. Then for the next five years, there was no word on China adding up its gold reserves. Suddenly, in 2008, China sprang a surprise by announcing that the People’s Bank of China had doubled its gold reserves in the past five years to 1054 tons.

According to gold bullion analyst Peter Smith, China may be accumulating gold these days. “China does not make public the status of its gold reserves every year as other central banks do across the world. So we do not know what is the current position of China’s gold reserves these days,” he says.

The world’s largest holder of gold is the United States. China is the sixth largest holder of gold reserves, globally. Emerging nations like India and Russia currently hold over 7% of their reserves in the yellow metal.

According to Ross Norman, CEO, of London-based bullion brokerage Sharps Pixley, China was rumoured to have been a good buyer of UK Treasury gold at the Bank of England auctions between July 1999 and March 2002, during which time the then Chancellor Gordon Brown had disposed of nearly 400 tonnes of UK gold.

Here is what Norman has to say on the Chinese Gold reserves:

“China currently holds just over $3 trillion in foreign exchange reserves (that's $3,000 bn) ; if it wanted to convert 5% of those reserves into gold at the current spot price (I would like to see them try) and bring them into line with their peers then they would need to purchase $150 bn of gold which is approximately 2,460 tonnes. In short, they would need to buy every ounce of gold mined in the next 12 months. Put another way - China would need to acquire as much metal as all of the Gold ETFs out there (currently accounting for 2,276 tonnes of metal off market) to achieve its aims.”

“If we accept that China does want to diversify away from dollars into gold then the question that sensibly needs to be asked is at what price would their order be filled at. Well of course it is impossible to say but if one considers the pivotal role the ETF had in shaking gold out from a 21 year low at $254/oz (the price of the first Bank of England gold auction) to today's all time high of $1920 then the impact would be at least as big, if not bigger (bearing in mind that gold is already supply-challenged).”

“Anecdotally we see that gold is repeatedly well supported on any dip and it is clear there is a large buyer in the market. It is difficult to ascribe a name and location to that buyer but we would not be surprised to hear that the Chinese have indeed been good buyers of gold by stealth once again.”

“It is clear there is excellent gold demand in China from retail investors and it is difficult to separate the 'official' buying from the institutional or indeed retail buying. Consumers in China are panic buying as a hedge against inflation and other economic concerns. As a result, China’s share of global demand for gold has increased from just 6% in 2000 to 18% in 2010.”

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