Where is China putting the gold it produces?

As had been expected, China, already the world No. 1 gold producer, saw its output rise again last year.  The country produced a record 360.96 tonnes  of the yellow metal in 2011, a 5.9% increase, making it the world’s top gold producer for a fifth consecutive year, according to  the China Gold Association.

Meanwhile, the country has been importing record amounts of gold as well with the volumes coming in through Hong Kong, which are officially reported figures, climbing to over 100 tonnes in November - and by all accounts gold purchasing in China has been booming since then, so imports are likely to have remained at this kind of level in December and January as well.  Estimates have suggested that China’s total gold imports for 2011 will have been some 490 tonnes - double that of 2010, but this may well be an under-estimate, possibly a substantial one.

But because Chinese total figures on imports and demand are actually obscured nobody really knows the true situation, except perhaps the Chinese government.  Export of gold is not allowed so total Chinese production (as noted above at around 361 tonnes) is going somewhere.  The question is, is it going into Chinese industrial, investment and jewellery demand, or is all this being catered for by the imports?

There is thus a strong suggestion that Chinese gold production is, in fact, all going into the country’s gold reserves which are only reported sporadically, and the last official pronouncement on this was that reserves totalled 1054 tonnes - back in 2008 - and this was nearly double the amount previously reported five years earlier at 600 tonnes.  If China is indeed putting all its domestic production into its reserves then these could now well be at 2,000 tonnes or more - but even this is still a small fraction of China’s total monetary reserves and there certainly has been internal discussion in China that the proportion of gold in its reserves should be much higher.

The argument stands that China is increasing its gold reserves surreptitiously because if it were confirmed officially that it was adding say 300 tonnes or more to its reserves annually (i.e. the amount of domestic gold production) this would have a strong upward impact on the gold price and make it more expensive to add further amounts of gold, in part in place of its huge trillion dollar holdings of U.S. Treasuries.  Whether this policy of not reporting its official reserves will continue will almost certainly depend on political expediency - and there’s no guarantee that if they are reported at some point in the future they will be the true figure anyway.  So the speculation on this will continue.

To add to the speculation, is a proportion of the huge imports also going into official reserves?  One analyst is quoted as saying, “It is clear there is a large buyer in the market. It is difficult to ascribe a name and location to that buyer but we would not be surprised to hear that the Chinese have indeed been good buyers of gold by stealth once again.”  This would support internal comments in China.  Forbes of the U.S. recently noted that the People’s Bank of China, the central bank, has been hinting that it is purchasing. “No asset is safe now,” said the PBOC’s Zhang Jianhua. “The only choice to hedge risks is to hold hard currency - gold.”

While the Forbes columnist suggested that Chinese official gold purchasing was actually unlikely, for a number of reasons, other observers are convinced otherwise with the view that the Chinese play a long game and the building of Chinese gold reserves is part of a path to the internationalisation of the Renminbi and ultimately the replacement of the US Dollar as the global reserve currency which they see as giving the U.S. huge advantages in global trade.

(Abridged from an article by Lawrence Williams posted at Mineweb.com.)