China is hiding gold… lots of it

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Less than a month since China shocked the bullion market by unveiling its official gold holdings, for the first time since 2009, analysts keep trying to answer the burning question of how much gold China really has.

Theories there are many, but the most recent one comes from Moneyweek’s expert Dominic Frisby, who claims the Asian giant is hiding no less than 9,500 tonnes of the precious metal.

Quoting Perth Mint’s Bron Suchecki, he says that China has encouraged private accumulation:

Studying gold flows, Suchecki argues that China is aiming for private citizens to accumulate 55% of flow – with the remaining 45% going to commercial banks and the central bank (the People’s Bank of China – PBOC).
His conclusion is that China has understated its official gold – but not by as much as many people were hoping. He arrives at the overall figure of 2,400 tonnes.
Commercial banks are holding another 2,060 tonnes, while there are 6,490 tonnes in the hands of private buyers – for a grand total of 10,950 tonnes in China.

According to data from the country’s central bank, China’s gold reserves stood at 1,658 tonnes (53.31m fine troy ounces) at the end of June. Six years ago, its gold holdings were 1,054 tonnes.

If you believe those numbers, Money Metals Exchange’s Stefan Gleason writes, then China has a long way to go to catch up with other countries. While the country’s official stash places it as the world’s sixth largest in absolute terms, it ranks much lower in relation to its economy and its total foreign reserves.

“China’s admitted gold hoard represents just 1.6% of its foreign exchange holdings. By comparison, Russia’s gold bullion accounts for 13.4% of reserves,” he says.

Building it up

The nation’s relationship with gold has been changing since 1993, when Beijing implemented one of the most significant changes to its gold policy. Since then, the market, not the state, has set the price of gold. And that was just the beginning. In 2000, China explicitly announced its intention to establish an open gold market as part of its 10th five-year plan.

In keeping with their tendency to deliver on its plans, China exponentially increased its domestic gold output, making it both the world top producer and consumer.

The nation has also invested heavily in developing gold markets abroad while aggressively promoting and facilitating easier ways for citizens to buy, sell, and store gold.

Source: WGC, 2015.

So, yes, the numbers don’t add up. But analysts agree the main question to be answered is not how much China really holds, but whether it will or not continue to buy gold.

Mark O’Byrne, founder and director of the international bullion dealer GoldCore, believes that Beijing will keep acquiring gold, to the tune of about 100 metric tons a month. Similarly, Carsten Fritsch of Commerzbank thinks China will, at least, keep up the same pace as in the past. “I don’t see why that trend will slow down,” he told Bloomberg last month.

So far, they seem right. Demand out of China and India has increased thanks to recent low prices. Between the two countries, they are on-track to import 2,000 tonnes of gold this year – that is more than two thirds of the total annual global gold mine production, which is set to be about 2,800 tonnes this year.