LAWRIE WILLIAMS: China officially adds to gold reserves again
While we still disbelieve the ‘official’ total figure for the size of China’s gold reserves, assuming them to be far, far higher than the figure it reports to the IMF, for whatever reason it has changed its reporting tack and now seems to be reporting monthly reserve increases. In all probability this pattern is perhaps designed to make a point in that it is raising the non-U.S. dollar portion of its official foreign exchange reserves.
For the second month in a row now the Peoples Bank of China (the nation’s central bank) has announced a reasonably large purchase of gold for its reserves and, presumably, will be reporting the new level to the IMF. It’s gold reserves, as officially reported, now stand at 59.94 million ounces (1,864.3 tonnes) up around 380,000 ounces (11.8 tonnes) on the end 2018 figure. Somewhat contrary to expectations/predictions, the country’s total forex reserves grew in January by U.S.$15.2 billion due to an increase in its non-dollar assets.
The ‘official’ increase in gold and non-dollar assets has been announced as the country goes into the next stage of negotiations on trade and tariffs with the U.S. The announced increases may be to make a point that it can grow its forex reserves independent of any reliance on the U.S. dollar representing yet another diversification away from the global reliance on the dollar as the world’s principal reserve currency. China has an awful long way to go in achieving a possible long-term replacement of the dollar with the yuan (or perhaps a basket of currencies under the control of the IMF which includes the yuan as a key element). But the Chinese plan ultra-long term and this is indeed a start and we believe China, along with allies like Russia (which has been substantially raising its gold reserves over the past few years) see gold as a hugely important monetary asset in this respect.
Chinese media, not surprisingly, fully accept the country’s officially announced gold and forex reserve positions conveniently ignoring the country’s track record of announcing unchanged gold reserves for a number of years, and then suddenly announcing a substantial increase. One has to assume that it has been doing exactly the same over its reporting zero gold reserve increases for the 26 month period up to December last year and, probably, that its reported gold reserve size is bogus too! After all, it doesn’t allow gold exports, it is the world’s largest gold producer and importer, and every year estimates of Chinese gold consumption by the big analytical consultancies fall substantially short of known gold imports (from nations which break down their gold exports by country) plus China’s own production, plus an allowance for scrap conversion etc. and unknown import sources.
The above is why we tend to use Shanghai Gold Exchange gold withdrawal figures as providing a better estimate of Chinese gold flows than the analytical consultancies’ consumption figures. Last year’s SGE gold withdrawals came to a little over 2,000 tonnes, but the latest figure for Chinese gold consumption from the China Gold Association (which tends to be similar to the consultancies’ figures, was only 1,151.43 tonnes, well below the figure of known imports plus China’s gold output alone - even before allowances for unquantified imports and scrap conversion. We went into this in a bit more detail in an article published at the beginning of this month: China's 2018 Gold consumption up, production down.
We suspect that the Chinese gold reserve increase announcement is a direct response to figures recently released by the World Gold Council that 2018 was the biggest year for gold reserve increases since 1971. It perhaps now feels that monthly increases on a similar scale to those being announced by Russia will be seen by the markets as reasonable and not drive the gold price upwards as a result. This would enable it to keep accumulating gold at what it sees as a reasonable price level. Even so the gold price did kick up a few dollars in this morning’s trading and it remains to be seen how the yellow metal will do over the remainder of the week.