China shocks bullion market with small gold reserve increase

Here’s Ross Norman of London Bullion Dealer Sharps Pixley’s interesting quick commentary on today’s Chinese increased gold reserves announcement.  While the initial reaction on markets was muted, as the news sunk in gold was being marked down quite sharply.  Ross is one of the smartest gold commentators out there.

‘China shocked the bullion market by declaring today its official gold holdings for the first time in 6 years – the surprise was less that they had done so, and more at the incredibly small figure which is less than half the market consensus. China last reported a figure of 1,054 tonnes in April 2009 which has risen to only 1,658 tonnes today – we don’t believe the figure, but we struggle to understand the motivation for down-playing it.

With only 1658 tonnes of gold reserves this would put China in 5th position behind the US (8133 tonnes), Germany (3383 tonnes), Italy (2451 tonnes) and France (2435 tonnes). As a country with the world’s largest economy by some measures, one would have expected they would be well north of the German figure really. So what is at play here …

China is seeking a place at top table in financial markets by having its currency accepted under IMF rules (the so-called Special Drawing Rights) at a meeting to be held in October – in other words, to have the Yuan included by Central banks around the world as a reserve currency. As part of this process, China would need to fully declare its gold reserves ; in that sense the timing is as expected – its just the amount that makes no sense.

Secondly, China is struggling with an equity market in freefall and some have suggested that the timing of the declaration is to give comfort to domestic investors that their reserves are sizeable … but that makes no sense either, because they aren’t !

The third explanation – and here we move into the under-world of conspiracies, is that China wants to downplay gold as part of its reserves – especially as they are world’s top buyers both for domestic jewellery and to top up their official reserves (yes they are also the top producers but they are significant net buyers). This is to say that China may be adopting the reverse of the UK policy of the late 1990’s where it telegraphed in advance to the world its intentions to sell most of its gold reserves – thereby prompting a fall in prices to a 21 year low … thank you Gordon Brown.

I would suspect a decision has already been made by the IMF in principle about the Yuan joining the US dollar as a reserve currency (although I have no proof of that), effectively seeking to fill a void in reserves as Central Banks desert the Euro … and it does therefore need to update its gold holdings.

There is an apocryphal story about the Chinese Premier on a state visit to Paris who was asked what he thought about the French Revolution … “Too early to say” was his reply … which caused a guffaw amongst observers who were aware of China having an uber-long term view on things (actually he misunderstood the question !) … perhaps they are playing the long game both with regards to the economy and with regards to declaring its hand fully and openly on gold.

 

Ross Norman

ross.norman@sharpspixley.com

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2 thoughts on “China shocks bullion market with small gold reserve increase

  1. Steven Evanson July 17, 2015 / 4:04 pm

    I have read elsewhere in online gold sites that China imported about 1180 tons of gold through the Shanghai gold exchange in the first half of 2015. The numbers China released today don’t make sense. Why the huge discrepancy? If I were Chinese and had a long term perspective and wanted to corner the gold market and eventually sink the US dollar then shorting gold contracts on the Comex would be a very clever and patient way to go about it.

    Like

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