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LAWRIE WILLIAMS: China says it adds zero to its gold reserves – again

Although the value of China’s official gold reserve rose from $75.084 billion at end-July to $77.702 billion at end-August, the increase in value is entirely due to the rise in the gold price over the period.  This means that the nation has now not reported an increase in the volume of its gold reserves for ten straight months.  Some are prepared to accept this at face value in assuming that the Chinese central bank has not been adding to its reserves ever since the yuan officially became a part of the IMF’s Special Drawing Right (SDR) in October last year.  This follows 15 months of the country reporting monthly rises in its official gold holdings supposedly in the interest of transparency ahead of the final SDR upgrade decision by the IMF.

However, we don’t subscribe to the official Chinese position regarding the size of the country’s gold reserves.  The country has precedent in only reporting rises in its gold reserves at five or six year intervals maintaining the pretence in between that its gold reserves are not being increased.  The country’s official reserve currently is reported at 1,842.6 tonnes – the world’s fifth largest national reserve, but being caught by Russia which is reporting its gold reserve additions at the rate of around 200 tonnes a year.  Russia currently has an officially-stated gold reserve of 1,729.3 tonnes.

There is a strong supposition by bsome analysts that China’s true level of gold reserves may well be in excess of 5,000 tonnes.  It is comfortably the world’s largest gold producer and consistently known gold imports have been well in excess of the major consultancies’ estimates of consumption.  But even this may be irrelevant in terms of China’s ability to boost its reserves because there is also an assumption made by some observers that the country is also buying gold below the radar in transactions that do not appear in any official books.

China is very definitely a believer that gold will have a role to play in the future of global trade.  It is reported to be in the process of creating a crude oil futures contract, for example, which would enable trade in oil to be undertaken, avoiding the petrodollar, through payments made in yuan and, further that these yuan payments could be convertible into gold on exchanges in Shanghai and Hong Kong.  This would enable any putative U.S. sanctions to be bypassed which could be particularly beneficial to major oil producing nations like Russia, Iran and Venezuela which could all otherwise be potentially subject to U.S. imposed trade restrictions.  This is particularly significant given that China is the world’s largest importer of crude oil.

Grant Williams, author of the must-read Things that make you go hmm... newsletter (www.ttmygh.com) is quoted by the Nikkei Asian Review  as saying that he expects most oil producing nations would be happy to exchange their oil reserves for gold. “It’s a transfer of holding their assets in black liquid to yellow metal. It’s a strategic move swapping oil for gold, rather than for U.S. Treasuries, which can be printed out of thin air,” he said.

One should anticipate that China could roll out a similar deal for trade in other commodities as well and for this it would need to be sitting on a very substantial gold reserve – perhaps even more than the 8,133.5 tonnes reported as being held by the USA.  It may be well on the way to achieving this, but this remains supposition.

11 Sep 2017

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London – recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com

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