An increase in global demand for gold might be the magic bullet to propel the yellow metal back up in value and re-take the losses over the past year. One of the biggest stories of demand, however, has fallen flat with the recent announcement from the Chinese government that details the amount of gold in the country’s reserves. The numbers fell well short of some economists’ expectations. While the Chinese supposedly increased their gold reserves by over 600 tons since 2009, representing a 50% increase overall, this quantity doesn’t exceed any estimates, suggesting that global demand remains lukewarm for the time being.
China’s central bank reports 1,658 tones as of June 2015—but is this number really accurate? Some analysts question the legitimacy of this number, since China has seemingly been increasing their gold reserves consistently over time to position the country as a formidable economic player.
China’s Emphasis on Gold Holdings
The Chinese want a large quantity of gold on hand for the same reason that the United States keeps a few billion dollars’ worth of gold in Fort Knox. Gold serves China’s national interest as a currency reserve, serving to prop up the value of paper money rather than allowing the tempestuous currency market to dictate the yuan’s value. While the Chinese hold a vast amount of foreign currency in their national reserve, including the largest quantity of U.S. dollars outside of our own borders, their foreign currency holdings have declined as they are trying to diversify away from the dollar. At the same time, gold holdings account for less than two percent of the total foreign exchange holdings, below the 10% world average—or so they say.
Yuan Positioned To Become Reserve Currency
While the news of China’s increase in gold vaults China into the sixth-largest gold-holding nation on Earth, overtaking Russia, this news hasn’t pushed the price of gold over the edge into a bull market. Questions about consistency—whether China will go another half-decade without purchasing more bullion—kept the metal from gaining value on the commodities market. China doesn’t regularly release news of their gold holdings, and might have done so now as the country eagerly await the IMF’s decision to include the yuan 1 in their Special Drawing Rights. This would permit other IMF members to use the yuan as a reserve currency and send the value of the yuan into a welcome climb. This move, should it occur, would also likely cause the dollar to plummet.
Speculation About The Real Amount of China’s Gold
It remains to be seen how China’s interest in gold may influence the global gold market in the years to come. In fact, some analysts think China may be underreporting how much gold actually exists in their reserves. Since China mines more gold than any other nation, furthermore, with almost as much as the U.S. and Australia combined, where is it going? China is notorious for its imports of gold, and its high emphasis on gold as money, as well as its government’s secrecy and lack of transparency. Should it be revealed that China has more gold than the world thinks, this could cause gold prices to jump. Perhaps the Chinese government wants to keep gold prices low while it continues stockpiling its reserves, taking advantage of the current bear market to position itself for the next bull run.
Additional Sources:
1 – http://moneymorning.com/ext/articles/rickards/chinas-imf-announcement.php