LAWRIE WILLIAMS: China adds more gold to reserves, but relatively small amount
The latest figures for its forex reserves as published by the People’s Bank of China (PBoC) claim its gold freserves rose by a relatively small 5.91 tonnes in September. This brings the country’s total, as will be reported to the IMF, to just over 1,948 tonnes, still in 6th place among national gold holders as reported to the IMF, and now even further behind Russia in 5th place, which is accumulating gold at a faster rate according to IMF data. (See: Russia continues gold purchases but volume down yoy). According to the released data so far this year, both nations have been building gold reserves at a lower rate than before but, as we have suggested in previous articles, the Chinese figures in particular, as reported, have to be a little dubious and we suspect the real total is far higher.
So what evidence do we have of China under-reporting its gold holdings? The country has a track record of reporting months, if not years, of zero gold reserve accumulations and then reporting very large gold reserve increases which, in retrospect, must have been built up over the years it reported zero increases. In the past it has justified this by claiming this additional gold has been held in accounts separate from its forex reserves and thus not reportable to the IMF. It has gone through periods of reporting monthly increases – notably in the months leading up to the acceptance of the Chinese yuan as an integral component of the IMF’s Special Drawing Rights currency basket back in late 2016, following which it ceased reporting monthly increases for two years, but recommenced reporting monthly reserve increases, perhaps under IMF pressure, in December 2018. We suspect that the nation was actually still building its gold reserves in the two non-reporting years. Furthermore, given its past practice, we also even doubt the levels of its reported monthly reserve increases. China remains the world’s largest gold producer, and exports virtually no gold, so has plenty of scope for surreptitiously adding to its gold reserve total and further building its reserves in those accounts it feels no need to report to the IMF.
So why should China be doing this? In the past there have been instances of Chinese academics and government officials recommending in various speeches that the country expand its gold reserves to match those claimed by other leading nations – notably the U.S. which is reported to hold 8,133.5 tonnes of gold and Germany which reports holdings of 3,366.8 tonnes to the IMF. The theory is that the huge debt positions being built up by many of the world’s leading economies will, at some stage in the future, lead to a major economic and currency reset, in which gold will play an important part and countries like China, and Russia which also appears to be accumulating gold reserves at a comparatively rapid rate, will be particularly advantaged in such a reset if they have sufficient reserves of gold at the time.
Of course the doubts about the levels of Chinese gold holdings could cast similar doubts on the reported holdings of many other countries. The figures reported to the IMF are not audited and there is speculation that, although under IMF rules the figures may be accurate, perhaps some of the Central Banks no longer have immediate access to the gold they say they have, nor what is the actual tenor of their reported holdings. The U.S. Federal Reserve, for example, resists strongly all moves to audit its gold holdings – indeed any attempt to do so would be fraught with huge difficulties given the amounts of gold held in U.S. vaults on behalf of other nations. Gold swaps for example, which some central banks admit to, allow them to keep the gold on their books even though they may not have direct access to it any more. Central banks are all secretive beasts, so who knows what in reality their real holdings are?
Be this all as it may, China is a known manipulator of its gold reporting in the past and there is no reason to believe that it has changed its policy of hiding at least some of its gold holdings from general view. That does make its gold holding reporting more suspect than that of most other nations. We rest our case!
08 Oct 2019