Is China Buying Gold?
China holds a tiny proportion of its official foreign exchange reserves
in gold (just 1.6%) and has indicated a desire (see wikileaks as well as
comments from PBoC and China Gold Investment Research Institute) to add
to its modest stock of 1,054 tonnes of the yellow metal. China is the
world's sixth largest holder of gold reserves. Most emerging nations
including India and Russia currently hold over 7% of their reserves in
gold - and these are growing.
China has a track record of accumulating gold by stealth. In 2003 it
officially reported reserves of only 600 tonnes of the yellow metal but
surprised the market in 2008 by announcing it had quietly nearly doubled
its holdings to 1,054 tonnes. It is not clear where China had acquired
that gold, but it 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.
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.
Still, if the Chinese wanted to buy some gold, there is a chap currently
crossing the Libya/Niger border - who - if he has all his countries
reserves with him as believed, may have 144 tonnes to sell them.
Ross Norman
Sharps Pixley, London
www.sharpspixley.com