16 tonnes and what do you get? – More gold in Chinese reserves

The Chinese central bank – the People’s Bank of China – is continuing with its new policy of reporting increases in the country’s gold reserves on a monthly basis.  The latest figure announced is a gold reserve increase in August taking the announced total gold holding to 54.45 million ounces (1,693.6 tonnes), up from 53.93 million ounces  (1,677.41 tonnes) in July – an increase of around 16.2 tonnes.  Although this serves to confirm China’s position as the world’s fifth largest national holder of gold it remains hugely behind the USA with a reported holding of 8,133.5 tonnes and still also well below the top European national holdings by Germany (3,381.0 tonnes), Italy (2,451.8 tonnes) and France (2,435.4 tonnes).  Russia, which expanded its gold holdings by 31.1 tonnes in August to reach 1,318.8 tonnes, is the world’s sixth largest gold holder.

Interestingly media headlines for the latest Chinese purchase suggested that the Chinese gold increases have been in order to diversify its vast forex reserves away from the dollar, although it appears to be only doing this in a relatively gradual manner given it only holds under 2% of its forex reserves in gold compared with the USA’s 74% and the German, Italian and French holdings in the upper 60%s according to IMF data.  Russia’s holding is around 13%.

But most analysts disbelieve the Chinese total gold holding statistics anyway, reckoning they are almost certainly far higher with large amounts of gold held in non-reported accounts which it may move into its forex holdings, and report, when it is considered politically expedient to do so.  Consequently there are also openly expressed doubts about the now monthly reported additions to the Chinese reserves.  These seem to be smaller than might appear likely given the various officials’ and academics’ professed opinions on the importance of gold as a reserve asset in any global monetary re-alignment and the small proportion of the country’s forex reserves which gold represents.  China may reckon on only announcing small gold reserve increases so as not to unduly influence the metal price, but one suspects that the market could absorb higher Chinese gold purchases than are being announced at present.

All this is said to be a sign of greater transparency ahead of the delayed decision for the Chinese currency’s inclusion in the IMF’s Special Drawing Rights (SDR) basket of currencies.  This is seen as a precursor to the Yuan’s acceptance by many more countries as a global reserve currency to rival the US Dollar.  Already China has been setting up bilateral agreements with a number of nations to be able to conduct trade in Yuan and its acceptance in the SDR basket would move this process along much further.  Re. the SDR, the make-up is theoretically weighted to the GDPs of the nations whose currencies are included in the basket [currently US Dollar (41.9%), Euro (37.4%), Pound Sterling (11.3%) and Japanese Yen (9.4%)].  The inclusion of the Yuan, given that China is reckoned by the IMF to have already surpassed the USA in GDP in terms of Purchasing Power Parity (PPP), although not in nominal terms where it sits in second place, would mean some very significant changes would need to be made.

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