Gold was given a fillip this week following news over the weekend that China has been quietly building its gold stocks for most of this decade. Reserves were last specifically posted in 2003 and have shown on government records as 600 tons since the end of that year. In reality though the State Administration of Foreign Exchange (with the interesting acronym of SAFE ” considering all the criticism China has come in for over currency manipulation) has been refining scrap and sub standard gold holdings on top of buying from domestic producers such that now reserves stand at 1054 tons. This places China fifth in the world, ahead of Switzerland’s 1040 tons but behind the U.S. ranked first with 8,133 tons, followed by Germany (3,412 tons), France (2,508 tons) and Italy (2,451 tons) according to various sources. In general, Asian countries have been increasing their gold reserves this decade as European and IMF holdings have been neutral or reduced. There has been talk since early last year of the IMF selling 403 tons from their 3,217 ton reserve as part of a plan to close the Washington-based lender’s annual deficit according to Bloomberg.
Suggestions that China is seeking to diversify away from the US dollar to undermine the dollar’s position as a reserve currency have been dismissed by most commentators as unfounded but various Chinese departments have used revenues to buy hard assets such as metals, mining assets, equities and a gradually more diversified basket of currency holdings in a move seen more as an attempt to spread risk in the light of global uncertainty.
China’s purchases of gold may have contributed in some part to the metal’s strength over the last year or so. Normally, a strong dollar would result in a weaker gold price but gold has held up remarkably well as other metals have declined as noted in a forth-coming MetalMiner white paper due out this week. China is the world’s largest producer and although no data is currently available as to what price SAFE paid for the increase reserves there are suggestions (admittedly by their own Gold Association so treat them with caution) that China should increase its holdings from 1,054 tons to 5,000 tons. Be that as it may it appears at least to be a long term strategy to buy and hold gold reserves. To put the investment of the last 6 years in perspective, 600 tons is equivalent to 19.29 million troy ounces, the standard measure of gold. If we assume an average purchase price of $400/ounce over that period (may be high because some of the current reserves are from refined scrap and previous unrecorded lower grade holdings) that represents an investment close to $8bn. A good one mind you, at today’s price the 1054 tons are valued at $31bn and with foreign exchange reserves of $2trillion according to the WSJ it would take only a small fraction to raise gold reserves to the level of some European countries or even the US. As a hedge against inflation (inflation widely expected to come in 2011-12 as a result of the liquidity being pumped into the financial system) a more sizeable switch to gold from currencies may not be a bad long term investment. One of many things you can say for the Chinese – they are good at the long game.