China ended years of speculation and announced an almost 60 percent jump in its gold reserves since 2009. What does it imply for the gold market?
Finally! On Friday, the long awaited moment arrived when China ended six year of concealing its gold reserves. According to the People’s Bank of China, its official gold holdings rose from 38.89 million to 53.32 million troy ounces. It is a 57.33 percent jump, from 1,054 to 1,658 tons, officially in just one month, but everybody knows that the PBOC's was continuously buying yellow metal, although the gold inventory numbers remained unchanged since April 2009. The increase in gold reserves means that China overtook Russia and Switzerland in terms of holdings and became the fifth largest holder of gold in the world (the sixth when we include the IMF).
Why did China end six years of mystery over its gold reserves? There are two explanations. First, China is actively seeking the IMF's endorsement of the renminbi as an official reserve currency and including it in Special Drawing Rights. The disclosure on gold reserves could be a measure to increase the transparency and raise the credibility of the currency. Second, the announcement could also be aimed at calming investors after the stock market crash as the gold reserves are considered an asset increasing systemic stability.
What are the implications of the breaking of silence on China’s gold reserves for the gold market? Opinions are divided. Some people believe that the news will not affect the gold prices, because it is generally backward looking. Bears point out that the markets had expected a much steeper rise, while bulls argue that this means the Chinese have a lot more gold to buy. We fall somewhere between the first and second point. Why?
Well, the fact that the PBOC bought 604 tons of gold seems bullish; however, the scale of purchases was not big. It was a mere 100 tons of gold on an annual basis, which is less than 2.5 percent of the annual supply. Such an amount of gold is traded during a single day at the London market alone. Therefore, the announcement will not boost the price of gold, especially given that news is about past purchases.
To the contrary, it may have a negative impact on the market sentiment toward gold, if not on the prices. This is because expectations are what counts in the gold market. And investors had expected that China had bought a lot more of the yellow metal. There were speculations that the PBOC held 3,000-4,000 tons of gold, or even 8,000 tons, according to Bloomberg. The mere 1,658 tons are thus a huge disappointment, which can possibly explain why the price of gold actually plunged to the lowest level in more than five years in morning trade in Asia. It is true that China’s gold reserves only make up 1.6 percent of its total foreign exchange holdings, so the country has plenty more gold to accumulate to catch up with other countries. However, the central banks’ purchases are relatively small compared to the total gold production, not to mention holdings and the volume of trade. Therefore, gold investors cannot count on the Chinese to support the price of gold.
To sum up, China has finally updated its official gold holdings. It turned out that the People’s Bank of China had bought 604 tons of gold in six years (assuming that it is telling us the truth), which was significantly below expectations. Thus, it is rather bearish news for the gold market, since it shows that the Chinese are more lukewarm towards gold than many of the bulls believed.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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