China and gold

I got a kick out of a story earlier this week from Reuters that reported that China had renewed its commitment to the U.S. Treasury market but said it would be wary of substantially boosting its gold holdings.

Uh-huh.

The headline to the story was "China says committed to U.S. debt, wary on gold", and it was the headline that caught everyone's attention.

"It is, in fact, impossible for gold to become a major investment channel for China's foreign exchange reserves. I have 1,000 tonnes now, and even if I doubled that holding, according to current prices, that would be about $30 billion," said Yi Gang, China's chief currency regulator.

The comment caused the price of gold bullion fell about $3 an ounce. The price has come down a further $25 an ounce as the week comes to a close. Analysts contribute most of the drop, however, to unwinding of speculative bets linked to Greece's debt woes rather than disappointment over Yi's remarks.

Does that mean that China isn't buying gold anymore?

As one of the world's largest holders of US Treasury bills - the general estimate is that China owns close to $1 trillion of US Treasury securities - Chinese leaders have become more vocal in expressing their concerns over the United States' fiscal discipline and in calling for an alternative international reserve currency.

Since the outset of 2009, Beijing has taken pains to diversify its monetary risks, which include signing multiple bilateral currency swaps, and pushing for the restructuring of international financial institutions.

And diversifying includes China's actions in gold. In 2009 China reportedly bought 454.1 tons of gold from its domestic market, which is equivalent to nearly 50% of the total purchases of 890 tons of gold made by the world's central banks last year.

Add to this reports from the Guangzhou Daily newspaper that reported in 2008 that China's central bank was considering raising its gold reserve by 4,000 metric tons from the then 600 tons to diversify its forex risks (China's gold reserves currently total 1,054 tonnes, meaning that China is still looking to acquire 3,000 tons to match that 2008 goal).

A China News report last year (2009) cited Ji Xiaonan, the chair of the supervisory board for state-owned companies, who said that "China's gold reserves should reach 6,000 tons in the next three to five years and perhaps 10,000 tons in eight to 10 years".

Do you still think China has lost interest in acquiring gold?

By way of reference, US gold reserves totaled 8,133.5 tons in September 2008, accounting for 76.5% of its total forex reserves. Japan's 765.2 tons accounted for 1.9% of its forex reserves.

The inscrutable Chinese are hardly likely to inform the world that they are on a gold buying spree for fear of sending the gold price through the roof before they can finished their acquisition plans.

And while China is the largest gold producer in the world, with more than 300 tons of gold produced annually and while it is true that they will consume all 300 tons locally, the reality is that this internal production won't come anywhere near achieving China's goals for the acquisition of gold... especially if that goal is 6,000 - 10,000 tons within 10 years.

China increased its gold reserves by 76% in six years (2003) to 1,054 tons in 2009.

That dramatic increase of 76% caught the world completely off guard as those huge gains were garnered under the world's radar screen. It wasn't until it was suddenly announced to the IMF at the beginning of 2009 that anyone realized what China was doing.

In 2007, China surpassed South Africa as the world's largest gold producer, and in 2009 they passed India as the world's largest consumer of gold.

In 2009 China bought nearly 50% of the total gold purchases by central banks in 2009.

The Chinese PR machine tells you that China is "committed to US Treasuries and wary of gold."

So after all this activity, after all these surreptitious moves, after all the hand-wringing over America's finances, after publically stating their goal and objectives regarding gold holdings; China would have you believe they aren't moving out of US Treasuries and are wary of gold.

You believe that, right?

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