China’s Gold Story – A Contradiction
Please subscribe to my hub for immediate access to new articles. Enjoy.
- China is the worlds largest producer and importer of gold bullion. China has started the worlds largest physical gold exchange. They are pushing for more influence on global gold pricing.
- China is serious about having the yuan become a reserve currency by the IMF and has taken noticeable actions for approval.
- China revealed 600 tons addition to their gold holdings since 09 which puts them at number 6 globally for central bank bullion holdings.
- Many analysts doubt this is the real number of gold reserves and there are many contradictions in the Peoples Bank of China’s comments relative to Chinese gold demand.
- Chinese stocks are in free-fall since early June and it is clear that they will be using gold as a political tool to give investors security.
China is known for its secrecy. But in the end, are all governments not alike in that aspect? This brief article calls to question the recent exposure of China’s gold holdings (official nation reserves). Said simply – things don’t add up.
China last reported its gold reserves in 2009 with 1,054 tons and during summer 2015 they claim to have 1,658 tons. Besides the fact that China is the world’s number one gold producer and one of the largest importers of gold while simultaneously starting the Shanghai Gold Exchange (a rival to the U.S. Comex) which is a physical gold delivery market, China also now is part of the global gold fix and two weeks after it was accepted is openly discussing fixing gold in Yuan.
The China and India markets have accounted for more than half of all global gold consumption for the past few years, however both countries hold little sway over the daily spot-pricing of the precious metal, says Editor Li Kun from CCTV.
One would have expected, as many analysts have, that China’s gold reserves would more than have tripled since 2009.
Yet, 6 years later, China claims to have boosted their gold reserves by 600 tons – that is 100 tons a year. Many analysts aren’t so quick to believe the Chinese on this one. And neither does this author.
II. The Argument Presented
Examine the photo below:
To begin, the intelligent investor must scratch his or her head with curiosity that during the month of June, which was the worst stock market collapse in Chinese history (one could only have expected this with such low rates for so long; yet even the Chinese have not learned from history), after 6 long years the gold reserves conveniently are revealed. By these indicators, China’s MoM (month over month) reserves increased by roughly 60%. Thus as stocks collapse and the banks are lending billions to try and salvage a floor in Chinese equity prices, other extreme measures are being implemented such as freezing/halting trillions of dollars worth of trading and even the draconian method of arresting short sellers.
Exposing the nation’s gold reserves at a dangerous time for China served a political purpose. Also, with the nation trying to be accepted into the basket of currencies globally with a reserve currency designation from the IMF, a show of security could only help.
But why after so much gold production and consumption is there only a 600 ton increase?
The following is something that doesn’t quite make sense.
“Gold has a special risk-return characteristic, and at specific times is not a bad investment,” the People’s Bank of China said on its website. They continue, “But the capacity of the gold market is small compared with China’s foreign exchange reserves; if foreign exchange reserves were used to buy large amounts of gold in a short amount of time, it will easily affect the market.”
This is a relevant comment as the price of gold in June has done nothing but flounder and drift lower – thus if China’s MoM increase in gold was 600 tons, and as the PBOC (Peoples Bank of China) acknowledged, there would have been a large rise in the gold price. How does one simply add 600 tons of any commodity in one month and the price go down? A rational man shouldn’t find it hard to believe that with Russia and other nations being net buyers of gold already, that an additional 600 tons being demanded would only bolster prices.
The only other answer is that China has acquired all this gold previously as Western nations have been selling.
The PBOC says the following:
“Based on our analysis on gold’s value and price changes, and on the premise of not creating disturbances in the market, we steadily accumulated gold reserves through a number of international and domestic channels.” China’s purchases were made via assorted domestic refineries, production stockpiles and through trading on domestic and international exchanges, it said.
Yet as stated above, with being the number one producer of gold and the State Owned Enterprises (Chinese state run companies) buying gold assets, a paltry 100 tons a year is what they have to show since 2009? Logically, though, from an investor’s perspective, one doesn’t want to show others what they’re buying until they’re done buying themselves. Since China is buying and producing so much gold – why would they push the price up on themselves until they have what they want? Does anyone announce to others when a store is having a sale before they purchase what they can first?
It’s important to note that even with the additional 600 tons, China is now the 6th biggest holder of gold from a national reserve standpoint.
After China’s six-year silence on its gold holdings, by revealing them during the most dramatic stock collapse in Chinese equities China has made it obvious that its gold holdings will play a political purpose.
It is fair to assume that if China’s stocks fall further and there is a flight from the Yuan, the reserves of gold will miraculously be larger during their next showing. How much would it take to bring confidence back? Was 600 tons the correct amount? Doubtful.
It is also fair to assume that each month going forward, China’s gold reserves will increase without affecting the gold price – since nothing affects the gold price anymore. Greece defaulted? Shrug it off. Puerto Rico can’t make payments on debt? Oh well. Trillions being printed globally with 0% rates? Whatever.
Something does not make sense.
Contrarian and Austrian - Value Investing Ideas - Anti-Government Philosophy - Author.