A long bull market possible
Changes in management of China’s reserves could support price
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.