A long bull mar­ket pos­si­ble

Changes in man­age­ment of China’s re­serves could sup­port price

Finweek English Edition - - Creating wealth - LU­CAS DE LANGE

THE SEC­OND VISIT within a year by Pres­i­dent Hu Jin­tao of China to sev­eral African states, in­clud­ing SA, again cast the spot­light on the grow­ing fi­nan­cial re­sources of this emerg­ing gi­ant. Jin­tao could quite com­fort­ably dis­burse bil­lions, since his re­serves in for­eign cur­rency are now the largest in the world and grow­ing by US$18bn a month be­cause of huge trade sur­pluses.

For SA, in ad­di­tion to the ben­e­fits aris­ing from the gen­er­ous as­sis­tance to Africa, there’s an­other ex­cit­ing pos­si­bil­ity. This is that, since China is con­cerned about the com­po­si­tion of its re­serves, it will sys­tem­at­i­cally in­crease its gold hold­ings. The re­serves stand at more than US$1 tril­lion, and the reg­u­la­tor of for­eign ex­change, as well as high-level po­lit­i­cal lead­ers, have re­peat­edly said that a new sys­tem must be in­tro­duced, but there’s been no in­di­ca­tion of what’s ac­tu­ally in­tended. It’s gen­er­ally ac­cepted that China wants to be­come less de­pen­dent on the dol­lar. The ex­act com­po­si­tion of the re­serves isn’t known, but it’s es­ti­mated that about three-quar­ters con­sist of dol­lars and that the euro in par­tic­u­lar is ex­pected to play a larger role in fu­ture.

For SA, as the world’s largest gold pro­ducer, it would be of great im­por­tance if China – where gold is tra­di­tion­ally highly re­garded as a source of in­trin­sic value – in­creased the gold con­tent of its re­serves. Through­out the cen­turies, gold has tended to move to coun­tries where wealth is cre­ated, and its pur­chase could sup­port the gold price for many years. China’s gold re­serves are set at about 1%, far be­low the in­ter­na­tional av­er­age of 10%. Ac­cord­ing to the World Gold Coun­cil, the euro re­gion’s av­er­age is 39% and Amer­ica’s 26%. Re­search by Credit Bank Suisse First Bos­ton shows that if China were to push its gold re­serves up to 5%, it would have to buy about 2 340 tons. That’s equal to about two-thirds of the an­nual world pro­duc­tion and com­pares with the max­i­mum of 500 tons that, in terms of the so-called Wash­ing­ton ac­cord, the large cen­tral banks may sell an­nu­ally un­til Septem­ber 2009.

In the past, the US of­ten de­scribed gold as a bar­baric metal and said that its time was past. The dol­lar, it said, was as good as gold. At the same time, the world no­ticed it clung to its gold re­serves, es­ti­mated at 4 570 tons, in Fort Knox. In the US, this is sur­passed only by the sup­plies held by the Fed­eral Re­serve in New York, where about 5 000 tons are kept on be­half of sev­eral coun­tries, cen­tral banks and of­fi­cial in­ter­na­tional or­gan­i­sa­tions.

Un­til 1971, the dol­lar could be ex­changed for gold, and there’s no doubt that in the present cir­cum­stances, where there is so much un­cer­tainty about the vul­ner­a­bil­ity of the dol­lar, the re­serves will re­main un­touched. For­eign in­vestors also re­mem­ber well the losses they suf­fered when the dol­lar tum­bled in 2002-2004.

How­ever, com­men­ta­tors point out that the Chi­nese au­thor­i­ties’ pol­icy is to han­dle China’s re­serves care­fully, and that they will avoid

There's an ex­cit­ing pos­si­bil­ity that China will

sys­tem­at­i­cally in­crease its gold hold­ings.

weak­en­ing the dol­lar. The changes, which have prob­a­bly al­ready be­gun, will be grad­ual – and the same goes for build­ing up China’s gold re­serves.

In the mean­time, it will use the wealth to ex­pand its in­flu­ence world­wide – as Jin­tao’s visit to Africa shows.

It’s in­ter­est­ing that sev­eral of the cur­rent new moves sur­round­ing gold oc­cur in Viet­nam. The Viet­nam Gold Trad­ing As­so­ci­a­tion has, for ex­am­ple, asked the coun­try’s cen­tral bank to cre­ate a gold bank. A spe­cial cen­tre for trad­ing gold must also be de­vel­oped.

The pos­si­bil­ity that steady buy­ing by China could be­come an­other sup­port for the gold price is not be­ing taken into ac­count when pre­dic­tions – such as those of the World Gold Coun­cil – are made. There is nev­er­the­less gen­eral agree­ment that the cur­rent bull mar­ket may con­tinue for a long time, largely as a re­sult of the eco­nomic emer­gence of the East, es­pe­cially coun­tries such as In­dia (the most im­por­tant mar­ket for the yel­low metal) and China. The Mid­dle East­ern oil coun­tries could also be­come im­por­tant buy­ers.

An­a­lysts point out that though it’s im­pos­si­ble to pre­dict the price of gold, it’s been a long time since there has been such a favourable set of mar­ket fac­tors. The pre­vi­ous ma­jor gold bull mar­ket from 1970 to 1980 was un­der­pinned by many fac­tors sim­i­lar to those now sup­port­ing the mar­ket.

Har­mony CEO Bernard Swanepoel pre­dicted last week that the price could reach US$700/oz this year. If the rand plays along and re­mains above R7/$, it will en­sure the in­evitable cor­rec­tions in gold shares can be seen as buy­ing op­por­tu­ni­ties. The Kruger­rand, too, which has in­creased by more than 10 000% in the past 40 years, will re­main a win­ner.



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