China is something of a contradiction at the moment. Its stock market has been plummeting again – another 7% was wiped off the Shanghai Composite Index in this morning’s trade – a fall (although not as debilitating in percentage terms) which seems to have transferred itself yet again to other Asian markets, European ones and in early trading in New York with the Dow, S&P 500 and Nasdaq all opening sharply lower. The Yuan has also been weakening against the US Dollar despite signs that the Peoples Bank of China (PBoC) has been attempting to slow any decline given a sharp fall in its forex reserves (although given the enormous size of these reserves this seems just to have been perhaps more of a controlled Yuan devaluation.)
Meanwhile the PBoC has been continuing to bolster its officially announced gold reserves with an uptick of 19 more tonnes in December bringing them to 1,762.323 tonnes. As we have pointed out beforehand, though, although China supposedly came clean on its official reserve figures back in June this year, and has been announcing monthly increases since in the interests of transparency in line with its pending inclusion in the SDR currency basket, it is still widely believed the total reserve figure is, in reality, hugely understated, as may well be the size of the announced monthly purchases.
With the Russian central bank also continuing to increase its gold reserves there is an anticipation that 2016 could well see a continuation of the good level of overall central bank purchases we have been seeing over the past couple of years. However Russian forex reserves are not nearly as robust as those of China and any need to protect a continuation of the ruble downturn could be limiting. But with Russia relying so much on oil and gas exports, ruble devaluation is at least helping those companies involved in the resource sector stay afloat. Russia is less reliant on imports from countries whose currencies are not tied to the ruble anyway than many western economies would be in a similar situation. The lower ruble thus has less effect on the general populace than many in the west might surmise.
Regarding its gold reserves, China may well be unwilling to report its full total and monthly purchase figures in order to keep the gold market ticking over at a level which suits its long term financial aims. A major rise in the gold price, which would likely ensue should it report far higher monthly purchases and a possible tripling or quadrupling of its total reserve figure. may not be in its best interests. There is no auditing process on the level of gold reserves reported to the IMF on a monthly basis so, in effect, a country can just report these as it may suit its political and economic aims. It is known that China considers gold to be a key element in the future world currency and economic power scenario, and at the moment it may well just be keen to be seen to carry on raising its gold reserves at a rate which won’t make future purchases raise any red flags among economic analysts.
That gold plays such a huge part in the Chinese psyche – as it does in that of many other nations, particularly in Asia – is already evident in the enormous level of withdrawals from the Shanghai Gold Exchange this year. By December 25th these had reached 2,555 tonnes (See:Chinese 2015 gold demand equates to around 80% of total global gold output) – already a huge new record – and by the year end will have almost certainly reached a fraction short of 2,600 tonnes. Whether SGE withdrawals are an accurate representation of the nation’s actual gold demand or not (there are conflicting opinions on this), the record levels involved are certainly a great indicator of the national sentiment towards the yellow metal.
With the PBoC and its wholly-owned Shanghai Gold Exchange (SGE) planning to launch a Yuan denominated daily gold benchmarking price system, to rival that of the LBMA in London, currently reckoned to come into being in April, we are likely to see yet another crack in current gold price setting which is largely a New York and London process and very much COMEX paper gold market influenced. This may ultimately lead to a more physical gold-related system but, for those who believe the current process, and the resultant gold price, is manipulated/suppressed by Western central banks and their bullion bank allies, we could be just replacing a Western dominated system with a Chinese one and what that outcome would result in as far as the gold price itself is very much an unknown. With the huge amounts of gold which have found their way into very diverse Chinese personal savings over the past few years, one suspects China would do its best to eliminate any substantial downside risk since keeping its citizenry onside is a key policy aim. But how it would handle any upside movement is rather less certain. The greater its gold reserve build-up, perhaps the less likely it might be to interfere on the upside, assuming it does see gold as some kind of financial weapon in future global economic positioning which does seem to be the case.
3 thoughts on “Chinese central bank buys another 19 tonnes of gold in December”