One of the more perplexing divergences that have plagued precious metal watchers and goldbugs when it comes to the great "black box" that is the world's biggest buyer of gold in recent years - China (which overtook India after that particular country established unprecedented capital controls to block the import of gold) is that on one hand China has been allowing the outside world to glimpse its ravenous buying of gold through the Hong Kong-Shenzhen corridor (where nearly 70% of the Chinese gold jewellery business is located) since Hong Kong customs provides a full breakdown of how much gold it exports into China, yet on the other the PBOC has refused to update its official gold holdings in exactly five years.
Recall that it was Zero Hedge who before anyone else in September 2011 disclosed not only what the reasons were for China's historic, and largely under the radar, gold buying spree - namely that while consumer demand for gold would rise, it was mostly the Chinese central bank that was the origin of China's seemingly endless demand. We got tangential confirmation as much when in January Shanghai Daily reported the PBOC was expected to announce its gold holdings have "more than doubled." Of course considering China's official gold inventory is a paltry 1054 tons, this would hardly surprise anyone at this point.
So now that everyone is breathing down the PBOC's neck to finally reveal - with a five year delay - just how much gold it does hold, the Chinese central bank has done a U-turn on its indirect transparency and, as Reuters reports, has begun allowing gold imports through its capital Beijing, sources familiar with the matter said, "in a move that would help keep purchases by the world's top bullion buyer discreet at a time when it might be boosting official reserves."
"We have already started shipping material in directly to Beijing," said an industry source, who did not want to be named because he was not authorised to speak to the media. The quantities brought in so far are small, as imports via Beijing have only been allowed since the first quarter of this year, sources said.
But are about to get much, much bigger.
In a nutshell, going forward China can continue importing hundreds of tons monthly, but without Hong Kong being the main transit route and without its monthly export updates, nobody will have a concrete number of just how much gold China is importing.
The opening of a third import point after Shenzhen and Shanghai could also threaten Hong Kong's pole position in China's gold trade, as the mainland can get more of the metal it wants directly rather than through a route that discloses how much it is buying.
China does not release any trade data on gold. The only way bullion markets can get a sense of Chinese purchases is from the monthly release of export data by Hong Kong, which last year supplied $53 billion (31 billion pounds) worth of gold to the mainland.
Finally, with a five year delay, the PBOC has finally woken up not only to the data disclosure...
One of the reasons why China could be encouraging more direct imports was because it wanted to avoid taking the Hong Kong-to-Shenzhen route that makes its gold purchases public, while China wants to keep the trade a secret, sources said.
"There is a view that why should people know how much China is buying," said one of the sources at a bullion banking operation in China. "With the Hong Kong route, there is a lot of transparency and people can easily monitor what is going in and out."
Another source said the move to open up Beijing "is partly driven by the fact that Hong Kong is perhaps a little too transparent", but it is also to accommodate upcoming free-trade zones and non-jewellery demand.
... but the discrepancies:
Besides the 1,160 tonnes of gold imported from Hong Kong last year, China had about 428 tonnes of local production. The WGC has said Chinese demand in 2013 was 1,066 tonnes, leaving industry guessing about the "surplus" of around 522 tonnes, not including the amount of direct imports.
The central bank last disclosed its gold reserves in 2009, when it announced that its bullion holdings had risen to 1,054 tonnes from 600 tonnes in 2003.
Which goes back to the original question: just how much gold does the PBOC own, and what other catalyst is it waiting for before it provides the much anticipated update:
Central banks tend to be very secretive about their gold purchases and sales because prices are extremely sensitive to their trades. Rumours last year of Cyprus selling its gold reserves to prop up finances sent the metal down more than 10 percent over two days - its biggest such decline in 30 years.
"The major increase in gold supply to the Chinese market in 2012 and especially 2013 could be partly related to large-scale official purchases," according to a Klapwijk-led survey for the WGC that was released last week.
The report said while a part of the surplus was being used for commodity financing deals, some of it could be for the PBOC as well.
Rumours on PBOC's gold reserves range from 3,000 tonnes to 5,000 tonnes. The United States is the biggest holder of gold reserves with over 8,000 tonnes.
Even a 1,000 tonne increase from last announced levels could prompt a jump in gold prices, which would make the PBOC very cautious about the timing of any announcement, said two China gold market analysts, who didn't want to be named due to the sensitivity of the issue.
One thing is certain: it is only a matter of time before China does reveal how much additional gold its has bought since April 2009, the date of its last official update. One other thing that is certain: the PBOC (and everyone else who has been piggybacking on this trade) has been able to buy up thousands of tons of physical gold at cheap prices not only due to the relentless manipulation of paper gold prices by central banks and their market proxies, but also by China itself: recall that it was Zero Hedge that first explained "How China Imported A Record $70 Billion In Physical Gold Without Sending The Price Of Gold Soaring." In short, it had to do with gold's domiannt role (more so than copper) in Chinese financing deals, in which physical is bought in the spot market while gold futures are sold at the same time.
And since the physical gold would likely remain in China no matter what (likely transferred over to satisfy consumer demand), we suggested that the imminent unwind of various Chinese gold-backed funding deals, in addition to any reports out of the PBOC, would further add to the upward pressure on gold once financing deal intermediaries, were forced to cover their forward market shorts.
In either case, what the latest news out of China means is that what happens to gold once it enters the Chinese economy, where it is used not only as a simple commodity store of value, and money (much to the chagrin of the Chairmanwoman) but also as a major component of the carry-trade enabled gold financing deals, will be even more nebulous and an even bigger mystery than ever before. Just as the gold accumulating central bank wants it.
Still, if there is one thing that gives us comfort, it is that as we reported over the weekend, when it comes to the ordinary person on the street, the demand for physical, not paper, gold is higher than ever.
It is only a matter of time before this demand finally manifests itself in the manipulated price as well.