The Russian central bank added 21.8 tonnes of gold to its reserves in December. It is thus adding gold to reserves even faster than China, while the two nations between them account for around 90% of all reported central bank gold reserve increases. To read more on this click here to access my latest article on sharpspixley.com
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.
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.
The People’s Bank of China (PBoC) – the Chinese central bank – had been somewhat reticent about reporting increases in its gold reserves as part of its total forex holdings having previously stated them as being at the same 1,054 tonne level for six years up until June before announcing that they were then actually magically 1,658 tonnes that month. This amount was received with widespread scepticism, with most analysts reckoning they are actually far higher and there had also been criticism of the way the bank had been reporting its gold holdings – or rather not reporting them.
Now the PBoC seems to have changed tack and appears to be reporting its ‘official’ gold reserve figures on a month by month basis and for the latest month – July – now puts them at 1,677 tonnes – a rise of 19 tonnes in the month out of its now $3.65 trillion in total forex reserves – still equivalent to only around 1.5% of its total. Per contra, the U.S. claims to hold an official gold reserve, of 8,133.5 tonnes – or 72.6% of its total forex holdings – and Germany 3,384.2 tonnes (67.8% of its forex total). China thus would still seem to have an awful long way to go to catch up with the top Western nations’ holdings in purely tonnage terms and hugely more in percentage of its foreign exchange figures.
But how accurate are official gold holdings for any country as reported to the IMF anyway – at least in terms of nationally-owned gold? There have been widespread doubts expressed about the true physical gold reserve figures of many Western nations – The U.S. in particular – as IMF rules allow leased and swapped gold to remain in the reserve figures as if they were still physically present. Similarly, but on the other side of the coin, most Western analysts believe the Chinese reserve figures are hugely understated with massive amounts of gold held in ‘non-reportable’ government-controlled accounts, thus enabling the Chinese to avoid having to report much larger gold holdings to the IMF with a straight face.
And how important is the amount of gold held anyway? Western central banks seem to decry any value to gold – yet still continue to hold vast amounts of it. The Chinese and Indians, and a number of other nations too, seem to see gold as the ultimate money. Whether gold is just a ‘pet rock’, as a recent disparaging article in the Wall Street Journal described it, or true money as perhaps half the world or more sees it, it still has a tremendous psychological hold. It has been money, and been seen as the ultimate indicator of wealth, since time immemorial. It is inbuilt into the collective psyche and that certainly will not change overnight – if ever.
It also seems to be the situation that in China, a very substantial gold holding – far above the currently stated ‘official’ figure – is considered to be a prerequisite for attaining a stronger position for the yuan in global trade. However there are political niceties to be observed here in that China does not – at least for the time being – want to rock the U.S. economic boat and a huge increase in its announced gold holdings might be seen as doing so. China’s initial aim would seem to be having the yuan accepted as being part of the SDR bundle, which would effectively bring with it reserve currency status. Once this is achieved – who knows?
China’s limited yuan devaluation and controlled floating of the currency is being seen as a way of meeting at least part way some of the criticisms levelled at it by the IMF leading to a delayed inclusion within the SDR basket – which has to be inevitable ultimately. If this SDR decision is delayed too long, given the U.S. dominance of the IMF in terms of voting power, China could see this as an unfriendly act stimulated by the Western superpower and make moves to destabilise the latter’s global position – and it has a strong capability for so doing given its huge forex holdings, mostly in U.S. treasuries. But the time is not yet right, though if China has its SDR and reserve currency ambitions thwarted again the game could well change. China thinks long term in a way the West mostly does not. It may lose the odd battle but ultimately aims to win the economic war and who would give odds against the growing Asian superpower so doing!
China’s State Administration of Foreign Exchange has announced that the nation is to bring its Current Account reporting in line with International Monetary Fund standards. This will mean that all its reserve assets, including its gold reserve, which is widely believed to be far greater than the 1,054.6 tonnes currently reported to the IMF, will fall under one accounting headline. China, in the past, has reported its reserve assets as a separate item, somewhat parallel to its reporting of its trade account and financial accounts, according to an article in the South China Morning Post.
Bringing its accounts into line with an IMF standard is seen as part of China’s desire to have the yuan included in a revised Special Drawing Right calculation, as the IMF is currently entering internal discussions with its members on a possible restructuring of the SDR – the results of which are due to be announced later this year, and come into force at the beginning of 2016. This again is seen as part of a possible move en route to the yuan being regarded as a global reserve currency
But, we wonder, could this provide the opportunity for China to restate its current gold reserve position (assuming it has indeed changed as most seem to assume) as an adjustment brought on by IMF reporting necessities. It may be recalled that when China last restated its gold reserves six years ago it used accounts adjustments as a reason for the full number not having been reported to the IMF earlier. At the time it said that the additional gold had been held in a separate account which did not need to be reported. This time it could well use the requirement for meeting the IMF standards as a reason for substantially uprating its official gold reserve figure. This as ammunition for its possible global currency realignment which may become necessary if it is to have the yuan admitted into the SDR basket of currencies. We shall see.