How the China factor could spark a gold recovery
The market is set to change, as the world’s biggest producer aims to be more visible
The gold market could be heading for some fundamental changes as China shows every sign of wanting to become less of a price taker and more of a price setter.
As the world’s biggest producer and buyer of gold, the country will be satisfied with the current price, which most investors find disappointing, only until it has accumulated as much gold as it needs. Gold was trading at US$1 117/oz this week, a level last seen in 2010.
Last Friday China surprised the market by announcing its official gold reserves for the first time in six years, at a level well below most market estimates. It said it held 1 658 t, making it the world’s fifth-largest holder of gold. Some analysts, having extrapolated from the most recently published figures, had estimated that China would have held about 3 500 t by now, and others had expected that the figure could be 10 times higher. In fact, the government has accumulated only about 600 t in six years.
Sharps Pixley MD Ross Norman says there is some speculation about the reason China decided to release its gold reserve figures now.
It could be because the coun- try is bidding for the yuan to become one of the IMF’s special drawing rights (SDR) currencies and as part of that process it would have to adhere to IMF reporting standards.
But Norman says the release of the figures now could also be “more a signal to domestic investors . . . the increase in gold holdings may provide the Chinese markets with confidence that their reserve holdings are really quite significant . . . a confidence-building exercise at a time when their equity markets are in free fall”.
It is not clear whether the figures published by the People’s Bank of China included any purchases by other Chinese official agencies such as the China Investment Corp and the State Agency for Foreign Exchange, he says.
Capital Economics commodities economist Simona Gambarini says the low level of China’s reserves suggests there is more buying to come. “We expect further official purchases by China to be one of several factors supporting the price of gold in the next year or two, despite the prospect of tighter US monetary policy and renewed strength in the dollar.”
Gold has been in the doldrums for several years. While its failure to respond to global inflationary pressures and geopolitical tensions has baffled many investors, others argue that there are conspiracies to keep the price low.
One theory doing the rounds last year was that some of the world’s biggest central banks no longer owned the gold reserves
1 800 they reported officially and were holding the price down so they could buy gold back.
Another version of this, by James Rickards of the Daily Reckoning , is that China is the manipulator. Rickards says about 70% of the US’s reserves are in gold and about 1% of China’s (using its latest update, the figure is 1,65%). US and Russian gold reserves are about 2,7% of GDP, but China’s gold reserves are a far lower proportion. Rickards argues the Chinese government has an obvious motivation to hold down the price of gold artificially so it can build up the reserves to back its currency.
A more conventional argument is that gold is weak because money is shifting to US treasuries on prospects of a US interest rate hike, and this is strengthening the dollar. The inflationary consequences of US, European and
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SOURCE: INET BFA