As we wrote recently, in what may become a rerun of the Rare Minerals export cut, after an abnormally long silence, China is finally starting to make noises in the gold market. As Bloomberg reported earlier, according to an article appearing on the website of the Chinese Ministry of Commerce, Meng Qingfa, researcher as the China Chamber of International Commerce said that China should buy more gold to diversify its foreign exchange reserves. "China should increase its gold holdings if the country aspires to “internationalize” its currency. China has $2.6 trillion of foreign-exchange reserves, mostly in dollar assets, Meng said. Such holdings will put China at a disadvantage when the U.S. dollar depreciates, as is inevitable amid a worsening U.S. debt problem, he said." While this is not an outright endorsement that the PBoC will begin to warehouse the precious metal, it is certainly an escalation in the war on words that the US and China have been engaging in for quite some time. The bigger problem is what may happen to the world gold market should China, which is now the world's largest producer of gold, decide to internalize its gold product output. Already the country's gold demand is surging. Should roughly 340 tons, or the amount of gold China makes each year, be withdrawn from supply, no amount of Goldman contemplation on the matter of physical ETFs will prevent a spike in the metal price.
More from Bloomberg:
Gold demand in China, the world’s largest producer, already gained in the first half of this year as government measures to cool the property market and falling equities spurred investment, the Shanghai Gold Exchange said July 7.
Sales of gold products such as bars and coins by China National Gold Group Corp., owner of the country’s largest deposit of the metal, jumped as much as 40 percent in the first half, Song Quanli, deputy party secretary at the company, said July 7.
China’s gold output may rise to 340 tons this year, from 314 tons last year, solidifying the nation’s position as the world’s largest producer, Zhang Fengkui, section chief of the raw materials department at the Ministry of Industry and Information Technology, said on Oct. 16.
To increase physical gold supply, the central bank also said on Aug. 4 that it will “increase the number of commercial banks who are qualified to import and export gold, based on the market demand situation.” The central bank also said it will support overseas investment plans by “large-scale” bullion companies by backing them financially.
At this point the only variable is the position of China's State Administration of Foreign Exchange or the custodian of all foreign reserves. In July, SAFE announced that U.S. government debt has the benefits of “relatively good” safety, liquidity, low trading costs and market capacity.
Gold is unlikely to become a major holding in China’s foreign reserves because of the metal’s big price swings and lack of interest payments, SAFE said then.
Is it time for an update on SAFE's opinion on US Bonds... and on gold?