Back in 2011, Zero Hedge first asked the key question that matters to the gold market: what are China's true holdings of physical gold.
As is well known, the last time China did provide an update of its official gold inventory was in early 2009 when it disclosed to the IMF some 1,054.1 tons of gold held at the PBOC headquarters (or elsewhere). The problem is that this number is now very outdated, and substantially undercuts China's true gold holdings.
To be sure, there has been extensive speculation on the topic, suggesting China's current gold may be anywhere between 3,000 and 8,000 tons (or more) but the reality is that until Beijing itself decides to officially reveal the number, speculation will remain just that. And, as we and many others, Bloomberg included, have noted such a revelation will not come in a vacuum, but will be largely a political statement about the preparedness of the Renminbi to replace the US Dollar as the world's reserve currency.
"China increases its gold reserves in order to kill two birds with one stone"
"The China Radio International sponsored newspaper World News Journal (Shijie Xinwenbao)(04/28): "According to China's National Foreign Exchanges Administration China 's gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.
It is no secret that one of the primary prerogatives of the Politburo in recent years has been to do just that: internationalize the RMB, as such quietly adding to its gold reserves is precisely in the interest of the Chinese nation.
This is what Bloomberg said today when it decided to turn its attention to this critical topic:
While the metal is no longer used to back paper money, it remains a big chunk of central bank reserves in the U.S. and Europe. China became the world’s second-largest economy in 2010 and has stepped up efforts to make the yuan a viable competitor to the dollar. That’s led to speculation the government has stockpiled gold as part of a plan to diversify $3.7 trillion in foreign-exchange reserves.
Bloomberg's own estimate:
The People’s Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tons, says Bloomberg Intelligence, based on trade data, domestic output and China Gold Association figures. A stockpile that big would be second only to the 8,133.5 tons in the U.S.
This is how Bloomberg arrives at this number:
China is the world’s largest gold producer and ranked behind only India among top consumers last year, but the amount of metal its central bank last reported holding in 2009 accounts for just 1 percent of foreign-exchange reserves, which have surged more than fivefold in a decade and are the biggest in the world. Most of that is in dollars.
At the same time, other "experts" are finally realizing what we have said all along:
[Adding gold] may bolster the view China has “a currency that’s well backed by a range of different assets,” said Steven Dooley, a Melbourne-based currency strategist at Western Union Business Solutions for Asia-Pacific. “The most-liquid currencies tend to have a wide range of foreign-exchange reserves.”
"If you want to set yourself up as a reserve currency, you may want to have assets on your balance sheet other than other fiat currencies,” Bart Melek, head of commodity strategy at TD Securities, said by phone from Toronto. Gold is “certainly viewed as a viable store of value for an up-and-coming global power."
Apparently not according to Larry "No More Buybacks" Fink, who overnight said that "gold’s traditional role as a store of wealth has been usurped by contemporary art and apartments in cities such as New York and London" and then proceeded to pitch ETFs as a far better means of trading gold; ETFs of which Blackrock is, conveniently, the world's biggest provider.
One wonders: is that because apartments in London (and soon NYC) are about to be taxed through the nose, causing a selling panic as we reported before, or because the Bank of International Settlements does not have an artwork price suppression team? Or maybe it is simply because the world's billionaires simply can't find enough physical gold and have to resort to such ridiculous substitutes?
Ridiculous comments by firms that would prefer you transact in gold ETFs than collect physical gold aside, what is more interesting is that as Bloomberg correctly observes, "China may be preparing to update its disclosed holdings because policy makers are pressing to add the yuan to the International Monetary Fund’s currency basket, known as the Special Drawing Right, which includes the dollar, euro, yen and British pound. The tally may come before the IMF’s meetings on the SDR next month or in October, Nomura Holdings Inc. said in an April 8 report."
What should one expect:
With China disclosing so little about its hoard, finding out how much the central bank has in its vaults is of increasing interest to traders. Confirmation of bigger holdings would signal the importance of the metal as a reserve asset and boost market sentiment, TD Securities’ Melek said. At a time when prices are languishing, the buying could give support, said Suki Cooper, director of commodities at Barclays Plc in New York.
In a rare comment on gold, Yi Gang, the central bank’s deputy governor, said in March 2013 that the country could only invest as much as 2 percent of its foreign-exchange holdings in gold because the market was too small. The press office of the People’s Bank of China in Beijing didn’t respond to a fax seeking comment sent on April 14.
Because apparently it never crossed anyone's mind that if China was indeed preparing to announce a new gold-backed quasi-reserve currency it would try to talk the number down, not up, until the actual revelation.
Ashish Bhatia, the World Gold Council’s director, central banks and public policy, in New York, said there’s a lot of room for China to expand. It’s ideal for central banks to have 4 percent to 10 percent of assets in gold, he said. The PBOC may already hold at least 3,000 tons, said Warren Hogan, chief economist at Australia & New Zealand Banking Group Ltd. in Sydney.
“Gold has always been, through the history of China, a way to project power,” Kenneth Hoffman, a metals and mining analyst at Bloomberg Intelligence, said in an interview on April 9. “They are thinking about how to make the yuan more international, and so this is a possible reason why they are buying so much gold.”
As a reminder, according to another recent estimate by BullionStar, if China were to announce that they hold 5 % of total reserves in gold, this would translate into roughly 5,000 tonnes.
So while the reality is that nobody has a clue what China's actual gold holdings are, the good news is that the answer is coming. As noted above, Chinese Premier Li Keqiang has asked the head of the International Monetary Fund to include China's yuan currency in its special drawing rights (SDR) basket. "China will speed up the basic convertibility of yuan on the capital account and provide more facility for domestic individual cross-border investment and foreign institutional investment in China's capital market," Xinhua paraphrased Li.
And while the official IMF meeting to determine whether the Special Drawing Right should be extended to include China's currency will take place in October, the informal board meeting will take place in a few weeks in May.
So if China is serious about CNY inclusion in the SDR, it will finally have to reveal its cards which would mean it updating the IMF, and the world (with a 6 year delay) just what its latest gold holdings are.
As such, don't be surprised to wake up one morning to headlines blasting that Chinese gold holdings have gone up by 2x, 3x, 5x or (more x) since 2009, a long-overdue update which will catalyze the next major leg higher in the precious metal.