Dear PGM Capital Blog readers,
On Friday, July 17, China ended years of speculation about its official gold holdings by revealing an almost 60 percent jump in its reserves since 2009.
The People’s Bank of China (PBOC), the country’s central bank, announced on Friday, that its gold reserves have grown by 57% to about 1,658 metric tonnes (53.31 million fine troy ounces) as of the end of June. This is the first official update to China’s gold reserves since April 2009, when it reported that its gold reserves were 1,054 tonnes.
The purchases show how China is seeking to diversify its reserves away from the US dollar at a time when the price of gold has fallen to near its lowest price since 2010.
China has been reducing its foreign exchange reserves this year, reporting 3.69 Trillion US-Dollars, at the end of June, down from 3.84 Trillion US-Dollars in January.
The People’s Bank of China said on its website:
“Gold has special risk-return characteristic, and at specific times is not a bad investment”
The reason why everyone has been so focused on Chinese official gold holdings is that there has been no official update to the gold inventory of the world’s biggest nation, which have been fixed at 33.89 million oz since April 2009, a little over 1000 tonnes.
The long awaited moment, finally arrived on Friday, July 17th, in the morning, when after a 6 year delay, China announced that its gold holdings had increased from 38.89 million to 53.31 million troy ounces, a 57% increase “in one month.” as can be seen from below table.
The amounts to a new grand total of 1,658 metric tons, an increase of 604 tons from the 1054 reported last in 2009 and which according to the PBOC was also the May 2015 total.
According to the World Gold Council, China’s gold reserves are now the fifth largest of any country in the world and sixth when you include the holdings of the International Monetary Fund (IMF). Only the United States, Germany, Italy, and France hold more gold than China as can be seen from below table.
The latest total is about half what the market thought it was. The market was generally expecting a total of well over 3,000 metric tons, according to Brien Lundin, editor of Gold Newsletter.
In our April 26, blog article we wrote that “The Mystery Of China’s Gold Holdings Is Coming To An End” as a result of China willingness to add the Yuan to the IMF’s SDR currency basket which would require the disclosure of China’s gold holding ahead of an IMF meeting on Special Drawing Rights (SDR) composition which may be held in October.
PGM CAPITAL COMMENTS:
The increase in China’s gold holdings highlights the precious metal’s role in the global financial system as a bank reserve asset. Central banks, as a group, have continued to buy gold over the past three years even as prices plunged more than a third from their record, set in 2011.
While we welcome some long overdue transparency by China, the numbers they reported on Friday July 17, are well below official expectations. The market was generally expecting a total of well over 3,000 metric tons.
This is what Bloomberg Intelligence said previously:
“Based on trade data, domestic output and China Gold Association figures, the People’s Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tonnes,”
Ken Ford, president of Warwick Valley Financial Advisors, said:
“China has been pressing to be included in the International Monetary Fund’s Special Drawing Rights, or SDR, currency basket. So they want to show that the have accumulated enough, but do not want to show their whole hand because it may spook the markets”
China has undertaken economic reforms aimed at persuading the IMF to include the Yuan in the basket, which would accelerate its acceptance as a reserve currency.
We believe that lifting the Yuan’s potential as a global reserve currency is what’s behind China’s move to lift the shroud of mystery surrounding its hoard of gold.
That could mean China will be adding a lot more gold to its reserves in the months to come.
China also has ambitions to create a global reserve currency to challenge the hegemony of the U.S. dollar and the Chinese clearly recognize gold’s role in providing credibility and status to what would be a new currency on the international stage.
The IMF will be considering the inclusion of the Yuan under the special drawing rights in October, to become part of the IMF’s SDR basket, China will almost certainly have to unpeg its currency from the US dollar.
The above means that the coming weeks up the IMF meeting regarding the reshuffling of the SDR, in October, we can expect some more fireworks news from China.
Until next week.
Yours sincerely,
Eric Panneflek