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

China gold reserves up 19 tonnes in July. Really?!

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!

Delay ahead in Chinese yuan acceptance into SDR

This morning the LBMA gold price was set at $1,086.50 down from $1,092.60 down $6.10. The euro equivalent was unchanged from yesterday. Ahead of New York’s opening, gold was trading in London above $1,091.50 and in the euro at €1,001.15.

The silver price closed at $14.59 up 7 cents in New York. Ahead of New York’s opening it was trading at $14.62.

There were sales of 2.087 tonnes from the SPDR gold ETF and 0.34 tonnes from the Gold Trust on Tuesday. The holdings of the SPDR gold ETF are at 672.703 tonnes and 162.58 tonnes in the Gold Trust. This had a barely discernible impact as the gold price slipped slightly because of the strengthening dollar. As you can see the euro price was the same as yesterday’s price setting. But it is possible that the sales were immediately absorbed in Shanghai.

We noted that ahead of New York’s opening the gold price changed its daily pattern of slipping against the dollar and climbed quickly to over $1.093. In the euro it recovered over €1,000. With so many speculative short positions there is a distinct likelihood of a short covering rally. Let’s see.

Today’s news out of China is that the Chinese Yuan may see an announcement confirming it will be included as one of the SDR currencies, by the IMF, in November, but the implementation of this will be delayed for 9 months until September 2016.

Latest data informs us that the Chinese Yuan is now being used in 25% of China’s foreign trade and this percentage is accelerating. In 17 countries there are Yuan swap arrangements in place allowing this percentage to continue to grow.  2.8 trillion Yuan are used in foreign trade. The Yuan is 3rd in the world behind the dollar and the euro in trade finance.

But the intervention in the Chinese equity market and a certain degree of lack of transparency appears to be behind the reasons for the delay. Convertibility of the Yuan and a removal of capital controls would be needed to allow the Yuan to qualify as a reserve currency. Once it hits this category [now Sept 2016] we will have entered a multi-currency monetary system with dollar hegemony evaporating. This is positive for gold.

Julian D.W. Phillips for the Gold & Silver Forecasters www.goldforecaster.com and www.silverforecaster.com

Gold awaits data-driven Fed’s next move

Julian Phillips’ latest analysis of the gold and silver markets and their key drivers.

The key news of yesterday was the drop in U.S. GDP growth to 0.2% in the first quarter. More importantly the data coming out of the U.S. is for a continued slowdown with it possibly worsening. With no weather constraints now, the current quarter is crucial to what the Fed will do in the future. It has made it clear in the past that its actions are data driven so speculation as to whether a rate rise will happen in June, September or even later, appears pointless as future data will make that decision.

If the U.S. is slowing you can be sure the Eurozone is too, with the prospect of a recession there starting again. It is possible that, as different economic flows converge, we could see a very different global scene in the second half of the year to the one we are seeing now. How will that affect gold? One of the main flows that will directly affect gold this year is the continued path to a truly global gold market alongside the move of the Yuan to center stage in the global monetary system, while economic weakness returns. We see this to the detriment of the dollar. We know that the U.S. could use a much weaker dollar now, but China too, would like to see a steady to weak Yuan going forward. In this climate the environment for gold is distinctly positive.

Just remember that we have had 7 years of quantitative easing in the U.S. and now see it at massive levels in Japan and the Eurozone. If growth falters, questions about the abilities of governments to control growth jump up! That is gold positive!

Markets

New York gold closed at $1,204.00 down $8.20 on Wednesday. Asia saw it hold there and London took it up a dollar. The LBMA Gold price was set at $1,204.30 down only 50 cents. The euro equivalent stood at €1,076.13 down almost €20 while the dollar was weaker at $1.1192 down from $1.0993 against the euro. Ahead of New York’s opening, gold was trading in London at $1,203.40 and in the euro at €1,075.81.

The silver price closed at $16.53 down 8 cents on Wednesday. Ahead of New York’s opening it was trading at $16.57.

The dollar index fell, again, this morning  to 94.61 from 95.89 yesterday with the dollar continuing to lurch lower against the Euro from $1.1008 to $1.1212 today.   The fall of gold in the Euro is extraordinary and may spur arbitrageurs to lift the gold price in the Euro soon.  The question this poses is, “Is gold priced in the dollar or the euro?”  So now a weak dollar means a weak gold price?

There were no sales or purchases of gold from the SPDR gold E.T.F. or from or into the Gold Trust on Wednesday. The holdings of the SPDR gold ETF are at 739.065 tonnes and at 165.58 tonnes in the Gold Trust.

 

Julian D.W. Phillips for the Gold & Silver Forecasters – www.goldforecaster.com and www.silverforecaster.com

 

China, the yuan, the dollar and gold. Where is it all heading?

Lawrie Williams
I have just published an article on Mineweb which looks a little more deeply at the possible impacts of the Chinese yuan becoming part of the IMF’s Special Drawing Right basket en route to it being acceptable as a global reserve currency. This seems to be China’s aim, but we don’t see how it can happen without some major currency structural changes, and these could have a very significant impact on the future of global trade and on gold and it could force China to announce the long awaited uprating of its gold reserve this year – as many have speculated it will.

We see any move to bring the yuan into the SDR basket as necessitating China decoupling the yuan from the US Dollar. The SDR basket is made up of a mix of currencies – the dollar, euro, pound sterling and yen, the idea being that between them this provides broad stability in the SDR’s value over time and that bringing in a currency which is tied to one of the others already in the basket would defeat the overall objective! Thus to participate in the SDR we suggest that China will have to drop the currency peg to the dollar and allow it to float freely.

See: What happens to gold when the yuan floats free of the dollar?

The ramifications of this are potentially far greater than the financial markets have probably been anticipating. They have been assuming that in order to add credibility to the Chinese currency’s entitlement for inclusion in the SDR that China will at long last announce a big increase in its gold reserve – some reckon this will be upped to at least second place among globally held gold reserves – there is even a suggestion that it could usurp the U.S.’s position as the world’s No. 1 gold holder, although most discount this. For it to have any effect on the IMFs deliberations, due to be entered into next month with the decision to be made by October, such an announcement would have to come within the next few months – perhaps as early as in the next few weeks.

But be this as it may it is the ramifications of a freely floating yuan that is perhaps most concerning to the current U.S. dominance in world trade. The yuan is seen as undervalued and if allowed to float could rise sharply against the dollar – or rather the dollar might be seen to fall sharply against the yuan. There has even been the suggestion that the recent strength in the dollar has actually been strength in the yuan, to which as noted the dollar is tied, in anticipation of the unpegging of the two currencies and subsequent revaluation of the latter.

This could all be seen as a prerequisite for the yuan to take its place as a – not the – global reserve currency. But another point we made in the Mineweb article is that once China has achieved the level of gold reserve it is comfortable with and is deemed necessary to cement the yuan’s place on the world stage, it has every incentive to intervene and allow gold to rise at a steady pace, given its past policy of persuading its citizens to buy precious metals. An increasingly wealthy middle class, given this sector of the population is growing so fast, would be both a way of ensuring its continuing popularity as well as a way of boosting the overall economy.

Whether any, or all, of this comes about we will have to wait and see – but we may not have to wait long.