Central bank gold buying – what the media reports don’t really tell you

There’s been a fair amount of media coverage of the reduction in net central bank gold purchases seen so far this year, but the writers of these seem to treat all central banks as one.  The implied suggestion as a whole is that this group of gold holders are all cutting back on purchases.  But this has, in reality, been the case all along.  There have only been three central banks which have consistently added to their gold reserves on a regular basis over the past couple of years – Russia, China and, to a smaller but significant in total effect, extent Kazakhstan.  Since China began publishing its monthly gold purchase data in July last year it has, according to IMF data, added 174 tonnes of gold, while Russia has added even more at 230 tonnes.  Kazakhstan has added some 35 tonnes.

While observers will point out that the number of central banks adding gold into their reserves has diminished, this is largely irrelevant as, apart from the three central banks mentioned above, movements of gold into other individual central bank reserves has pretty well been minimal over the past two to three years.

The fly in the ointment is Venezuela, which over the same period has reduced its gold reserves by over 100 tonnes to help it meet its foreign debt commitments and given its dire financial position may well continue to liquidate gold from its reserves, which used to be Latin America’s largest.  But its capability for continuing to liquidate at this kind of rate will become more and more limited as its reserves are run down.

While Russia’s and China’s monthly reserve additions appear to have been being cut back of late, one can’t really read too much into this in terms of a concerted reduction in central bank gold buying given the somewhat erratic nature of their month by month reserve increases in the past.  Russian monthly reserve increases, for example, have varied from zero in January and February 2015 to 34.5 tonnes in September last year.  China too has demonstrated sharp ups and downs in its reported reserve increases – from zero in May this year to just short of 21 tonnes in November last.

Of course prior to June last year China was officially reporting zero month by month additions for the prior 6 years before announcing a massive 604 tonne increase that month alone.  In the past, when it has also increased its reported reserve size substantially after several years of reporting no increases, it has said that this gold was held in a separate government account and thus non-reportable to the IMF.  Perhaps this is still the case.

There has thus been much speculation over the true level of Chinese government-controlled gold reserves given announced  data changes like those of last June.  In a country where all major institutions, and even the commercial banks, are effectively totally subservient to the state, there is a likelihood that gold reserves effectively under state control are very substantially higher than the latest official figure of 1,823 tonnes.  Many speculate that  gold effectively under Chinese government control, including that held in the SGE, commercial bank vaults and perhaps in other government accounts, could well amount to 5,000 tonnes or more.  Some speculate they could even exceed the officially reported holdings of the U.S.A. which are at 8,133.5 tonnes.

China is set on full internationalisation of the yuan (renminbi) and feels that its gold holdings could help it achieve this.  It is already well on its way with the yuan becoming an integral part of the IMF’s Special Drawing Right (SDR) on October 1st.  This will give it effective status as A global reserve currency, although not THE global reserve currency.  If any country’s currency can be said to be THE reserve currency that would still have to be the U.S. dollar, but it looks as though China is trying to chip away at this status, giving, as it does, certain economic advantages in world trade.

Lightly edited version of article published by me yesterday on the info.sharpspixley.com website

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