China's Gold Reserves: Watch What They Do, Not What They Say

Sprott Group's picture

Yi Gang, Vice Governor of the People's Bank of China (PBOC), recently made the headlines with his comments on Chinese gold reserves. On Wednesday, Mr. Yi stated that China's gold reserves remain static at 1,054 tonnes, and suggested that a sizeable increase in those reserves would be unlikely in the future. "We need to take into account both the stability of the market and gold prices," Mr. Yi stated, adding that as the world's largest gold producer and importer, China produces about 400 tonnes of gold annually, and imports an additional 500 to 600 tonnes of gold every year. "Compared with China's 3.3-trillion-U.S.-dollar foreign exchange reserves, the size of the gold market is too small," Yi said, rejecting speculation that China would further diversify its foreign reserve investments into the precious metal. "If the Chinese government were to buy too much gold, gold prices would surge, a scenario that will hurt Chinese consumers ... We can only invest about 1-2 percent of the foreign exchange reserves into gold because the market is too small," Yi stated.

If Yi's comments are to be believed, he is implying that the Chinese government has not added a single gold bar to its reserves since 2009 - which was the year the Chinese government officially announced its gold reserve increase to 1,054 tonnes. Given the production and import numbers stated above, we find that extremely hard to believe.

Mr. Yi's comments stand in stark contrast to earlier comments made by Chinese government officials regarding the need to increase China's gold reserves to ensure economic and financial safety, promote yuan globalization and act as a hedge against foreign-reserve depreciation. In 2009, a State Council advisor known as "Ji" said that a team of experts from Shanghai and Beijing had set up a task force to consider expanding China's gold reserves. Ji was quoted as saying "we suggested that China's gold reserves should reach 6,000 tons in the next 3-5 years and perhaps 10,000 tons in 8-10 years".

More recently, Gao Wei, an official from the Department of International Economic Affairs wrote a commentary in the China Securities Journal in November 2012 stating: "While gold prices are currently near record highs, China can build its reserves by buying low and selling high amid the short-term volatility." Gao also described China's gold reserves as being "too small", according to articles on the subject released by Bloomberg.

According to a recent World Gold Council (WGC) report, central banks have consistently bought gold over the past eight consecutive quarters, representing the highest level of central bank gold demand since 1964. The WGC stated that on average, gold constituted 13% of total central bank reserve holdings between 2000 and 2012. The WGC also suggested that in an optimized scenario, gold should represent 9% of foreign exchange reserves when factoring in all alternative currencies. China would need to grow its reserves from 1,054 to 5,541 tonnes if they were to follow this advice. We believe this figure is much closer to what China is targeting than its current reserves.

We also believe China's current gold reserves are significantly more than the stated 1,054 tonnes. Given that the entirety of China's domestic gold production remains held in-country, the escalating level of gold imports through Hong Kong (which have totaled a cumulative 1,051 tonnes since 2010), and the sheer size of China's US dollar reserves, it seems highly probable that a large portion of that gold is making its way to the PBOC. The fact that Chinese officials seek to deny this should not be surprising, as any suggestion to the contrary has the strong potential of moving the gold price higher. Investors will remember that China's 2009 gold reserve announcement propelled gold above US$1,000 shortly thereafter, which it has traded above ever since.

Given the way their announcement affected the price for gold, we doubt China will reveal how much gold it has accumulated until it is satisfied it has accumulated enough. The question now is how many tonnes "enough" will represent.

When it comes to China's gold reserves, watch what they do - and don't believe everything they say.

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rlouis's picture

duplicate by delayed reason

twoggle's picture

This google translate from an Chinese article which I think pretty much describes their strategy from 2009 going forward:

October 10, 2009
"Changing the portfolio structure is the real way out. Holdings of crude oil, mineral and other strategic resources, holdings of euro assets, some high-quality corporate bonds and equities are a viable option. .... In our view, increase the amount of gold reserves of foreign exchange funds should also be part of a diversified investment strategy. .... To develop the domestic gold mining industry, to increase the virtual gold reserves and production, savings in the country, savings to the people, such a strategy do but not say, it would not lead to price of gold soaring, the dollar rapid devaluation would not affect the value of the existing reserve assets." [Note: The google translation of the last sentence is poor, but I think you can get the gist of that recommendation. ] ....
Some of the Task Force members:
Wei Benhua: Deputy Administrator of the State Administration of Foreign Exchange
Li Lianzhong: Heads the Economic Department of the Communist Party, China
Mr Mu Zhi Qian, Chief Editor, China Foreign Exchange Magazine, State Administration of Foreign Exchange
Tan Yaling, an economist with the Institute of International Finance at the Bank of China
Zheng Runxiang: Senior Gold Investment Analyst
Tang Jing, an expert with the Tongling Nonferrous Metal Research Institute

Rusty Trombone's picture

Me Chinese

Me Play Joke

Me Put Pee Pee In You Coke

Bitchez !

shovelhead's picture

You go away.

No see nothing here.


Big Corked Boots's picture

Gold reserves? I have no gold reserves. I also have no silver reserves. Copper reserves are limited to the plumbing in my house (encumbered by my mortgage holder) and nickel reserves to the contents of my pocket (encumbered by my girlfriend).

Any other questions?

rlouis's picture

Implication is that the Chinese are sucking every ounce they can out of the US - and it is being done with a degree of animosity that I had not considered.  Makes Bernanke and the entire US leadership look like a bunch of strategic idiots - oh damn, now I've wandered into opinion land; lord knows the international bankers are all connected and deep thinking bastards. Re-education camps for the western elite?  It could happen, remember the Gang of 4, or maybe that was like Club Fed with perks.

MrBoompi's picture

China seems to have an interest in keeping the prices of gold and silver low, so her interests and those of JP Morgan's seem to be the same.  The numbers don't add up, but this just seems to be par for course for every market these days.

shovelhead's picture

It looks better on an abacus.

Confundido's picture

China buys between 15 and 18 tonnes of gold per week from three bullion banks. I don't expect anyone here to believe me. 

Lordflin's picture

'The price of gold' is a misleading phrase... Gold is not measured in dollars... dollars are measured in gold. That said, we will not resolve what has become a raging economic war with PMs, but rather with WMDs... If something remains of a civilization then the old adage will regain new meaning... 'Those with the gold will make the rules...'

Sorry for the morbidity folks, I just woke up...

tony bonn's picture

china took around 6000 tons last year during the february gold raid...1054 tons is a joke for fucktard consumption....

Confundido's picture

Gold bitchez, they did it to you again. They managed to sell more at 10am to keep you bitchez in check, below $1,610/oz. By tomorrow, we will be back to $1,590/oz. Get ready to retest $1,567/oz, bitchez. They can do whatever they please and the Chinese can only profit from this. So don't expect them to come to your help anytime soon.

caconhma's picture

With the Cyprus affair, this is begining of the end for paper-gold. A physical gold rush is just started.

lunaticfringe's picture

Watching the precious metals bank push down started about an hr. ago. That 5 billion in POMO money gathered Friday has to get used somewhere.

covert's picture

fraud surrounding gold isn't new.

mayhem_korner's picture

When it comes to China's gold reserves, watch what they do - and don't believe everything they say.


When it comes to anyone's gold reserves, watch what they do - and don't believe everything they say.

torak's picture

Regardess of ideology, all politicos lie. 

DoChenRollingBearing's picture

I believe that figure includes India's HUGE private jewelry holdings, little of that 20,000 tonnes would be official gold reserves.

anonnn's picture

Yi Gang speeks soothe.

Their gold reserves are 1,054 tonnes.

But their acknowledged "trading account to buy low and sell high", has itself accumulated perhaps 2,000 tonnes and are correctly not part of  sovereign gold reserves.

How could Generally Acepted Accounting Rules argue with this? The "rules" mean exactly what the rule-makers say they mean.

 Ain't it so, your lowness?

lunaticfringe's picture

I believe there is an above average chance that China already has more gold reserves than the US. People forget that the Treasury can liquidate gold and they are not required to report it anywhere. Years ago we had over 20, 000 tons- now they maintain we have 8300 tons. Accumulating 1000 tons per year, China would surpass us in 8 years. Hardly an eternity.

hmmtellmemore's picture

Where do you see this 8300 ton figure?

useless_fact's picture

The Chinese invented paper around 105 A.D. and kept it a secret for many years

monad's picture

Israel is a British colony

caconhma's picture

"Israel is a British colony". No, you got it all wrong. It is England and the USA are Zionist colonies.

monad's picture

all of the above is true

Treason Season's picture

Sprout pitching his newsletter? It's like seeing Steve Martin on the Gong Show.

beastie's picture

Sprott has a long history of exagerating the facts. Go ahead vote me down but before you click that down arrow do a little research. and this is just the tip of the iceberg. Drill down further and you will see him called out on his earlier bullshit about his delayed Silver deliveries and the fact that he has bought and does co mingle his physical with all the other players.

Don't get me wrong I'm a gold bug and realize if you are going to fight against the best liars in the world (Central banks and TBTF) then you better be prepared to use lies and propoganda yourself.   

Edit : i would like at least 100 down arrows. For every down arrow I will donate $1 to the Human fund.

swissaustrian's picture

I remember him calling $100 silver in April 2011 while selling at the same time.

Panafrican Funktron Robot's picture

You bring up a solid point, if you don't hold it, you don't own it, and that's true regardless of who's "holding it for you", even Sprott.

swissaustrian's picture

The $15 gold crash at the Hong Kong opening last night was noted.

Shaten's picture

China will admit to new gold holding numbers when there the #1 holder of gold, thus surplanting the USA currency.

Rainman's picture

OT...Suntech becomes mainland China's first default for half a billion...right around the same amount Oblameo lost on Solyndra. Another solar adventure gone bad.

Boris Alatovkrap's picture

OT... Cannot is trust a word come from China.