Where's All the Gold China Is Buying?

As had been expected, China, already the world's No. 1 gold producer, saw its output rise again this year. The country produced a record 360.96 tonnes of the yellow metal in 2011, a 5.9% increase, making it the world's top gold producer for a fifth consecutive year, according to the China Gold Association.

Meanwhile, the country has been importing record amounts of gold as well with the volumes coming in through Hong Kong, which are officially reported figures, climbing to over 100 tonnes in November, and by all accounts gold purchasing in China has been booming since then, so imports are likely to have remained at this kind of level in December and January as well. Estimates have suggested that China's total gold imports for 2011 will have been some 490 tonnes—double that of 2010, but this may well be an underestimate, possibly a substantial one.

But because Chinese total figures on imports and demand are actually obscured nobody really knows the true situation, except perhaps the Chinese government. Export of gold is not allowed so total Chinese production (as noted above at around 361 tonnes) is going somewhere. The question is, is it going into Chinese industrial, investment and jewelry demand, or is all this being catered for by the imports?

There is thus a strong suggestion that Chinese gold production is, in fact, all going into the country's gold reserves, which are only reported sporadically, and the last official pronouncement on this was that reserves totalled 1054 tonnes back in 2008, and this was nearly double the amount previously reported five years earlier at 600 tonnes. If China is indeed putting all its domestic production into its reserves then these could now well be at 2,000 tonnes or more, but even this is still a small fraction of China's total monetary reserves and there certainly has been internal discussion in China that the proportion of gold in its reserves should be much higher.

The argument stands that China is increasing its gold reserves surreptitiously because if it were confirmed officially that it was adding, say, 300 tonnes or more to its reserves annually (i.e., the amount of domestic gold production) this would have a strong upward impact on the gold price and make it more expensive to add further amounts of gold, in part in place of its huge trillion dollar holdings of U.S. Treasuries. Whether this policy of not reporting its official reserves will continue will almost certainly depend on political expediency, and there's no guarantee that if they are reported at some point in the future they will be the true figure anyway. So the speculation on this will continue.

Of course, to add to the speculation is a proportion of the huge imports we have been seeing recently also going into official reserves? Ross Norman of Sharps Pixley in London is quoted as saying "Anecdotally we see that gold is repeatedly well supported on any dip and it is clear there is a large buyer in the market. It is difficult to ascribe a name and location to that buyer but we would not be surprised to hear that the Chinese have indeed been good buyers of gold by stealth once again."

This would support internal comments in China. Forbes of the U.S. recently noted that the People's Bank of China, the central bank, has been hinting that it is purchasing. "No asset is safe now," said the PBOC's Zhang Jianhua at the end of last month. "The only choice to hedge risks is to hold hard currency—gold." He also said it was smart strategy to buy on market dips. Analysts naturally jumped on his comment as proof that China, the world's fifth-largest holder of the metal, is in the market for more.

While the Forbes columnist suggested that Chinese official gold purchasing was actually unlikely, for a number of reasons, (Click here for full article) other observers are convinced otherwise with the view that the Chinese play a long game and the building of Chinese gold reserves is part of a path to the internationalization of the renminbi and ultimately the replacement of the U.S. dollar as the global reserve currency which they see as giving the U.S. huge advantages in global trade.

Mineweb