In markets determined by supply and demand, it is always vital to know what factors are driving demand. For gold buyers, it is increasingly of interest that China is aggressively adding to its gold holdings.
How Much Gold Does China Really Have?
A recent analysis by CNN Money indicates that gold imported to China has surged by more than 700 percent in this decade alone. 1 The report notes two key points. First, the government of China does not report on its purchases of gold or what the motivation is behind the buying. Secondly, this significant amount of buying may actually be much higher, since it is based only on the disclosed gold passing through Hong Kong.
In fact, though the central bank of the country claims their reserves have grown only slightly this century, many question the veracity of this position. According to the head of the commodities team at Wells Fargo, John LaForge, “China has a lot more gold than they declare.”
He backs up this claim by pointing out that while many wealthy Chinese invest in gold, the country now consumes a stunning 40 percent of all newly mined gold each year. (Citizens of China were prohibited from owning gold during the years 1950 to 2004.) That level of buying gold has shown an increase of roughly 100 tons in 2010 to nearly 1,000 tons of gold per year as of 2015. This follows the purchase of almost 1,500 tons in 2013 alone.
As late as 2009 the Chinese government claimed to hold only 1,054 tons of gold. Despite disclosures of owning 1,700 tons in 2015, it was estimated by Bloomberg Intelligence that the actual figure exceeded 3,500 tons – and that was before the most recent buying. 2
The Motivation Behind China’s Gold Fever
While China is still behind the massive holdings of more than 8,000 tons of gold reported by the U.S., the dramatic increases by civilians and the government are driving many to ask what lies behind the trend.
On one level, it is understood that the People’s Bank of China continues to support the yuan in many ways, including buying gold. By purchasing this trusted commodity, the government hopes to create more confidence in its currency, while also diversifying its very large holding of U.S. dollars.
However, the analysts at CNN state, “Exactly what China is doing with all that gold remains somewhat of a mystery.” Additionally, Bloomberg notes that China is not alone, as many nations have been steadily expanding their gold holdings in recent years. Gold buyers and investors in precious metals take special note of this activity as it reverses nearly 30 years of selling gold from reserves.
Central Bank Gold Offers Security for Turbulent Economies
The World Gold Council contends the central banks of these nations view gold as an excellent hedge to deal with increasingly volatile global financial situation. The question for many is whether China is concerned about its economy and a possible economic crisis in the near-term. Regardless of the full motivations of the Chinese, such a growing demand by most major nations underlies the universal view of gold as a solid investment in trying financial times.
Additional Sources:
1 – http://money.cnn.com/2016/02/10/investing/china-gold/
2 – http://www.bloomberg.com/news/articles/2015-07-17/china-increases-gold-reserves-in-first-disclosure-since-2009