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The Mystery of China’s Gold Stash

Beautiful Gold

The Mystery of China’s Gold stash may soon be solved as the IMF is struggling for answers, China’s push to challenge U.S dominance in global trade and finance will no-doubt involve Gold — and plenty of Gold, we are talking about. While this very Precious Metal is no longer used to back paper currency today, it still remains a big chunk of Central Bank Reserves in the U.S, and Europe.

China became the world’s second-largest economy in 2010, and has stepped up efforts since to make the Yuan a very viable competitor to the U.S Dollar in the years ahead. That’s led to speculation that the Chinese Government has stockpiled Gold as part of a plan to diversify $3.7 trillion in foreign-exchange reserves, as the People’s Bank of China may have more than tripled its holdings of Gold Bullion since it last updated them in April 2009, to 3,510 metric tons, says Bloomberg Intelligence.

Today’s stockpile in Chinese Gold may be bigger than anyone could imagine, which could threaten the estimated 8,133.5 tonnes it is believed the U.S still has in its own reserves. “If you want to set yourself up as a World Reserve Currency, you may want to have assets on your balance sheet other than other fiat currencies,” Bart Melek, head of commodity strategy at TD Securities. Gold is “certainly viewed as a viable store of value for an up-and-coming global power,” he said.

China may be preparing to update its disclosed holdings because policy makers are pressing to add the Yuan to the International Monetary Fund’s currency basket, known as the Special Drawing Right, which includes the U.S Dollar, Euro, Yen and British pound. The tally may come before the IMF’s meetings on the SDR next month or in October, Nomura Holdings Inc. said in an April 8 report.

Monetary Role

Gold played a central role in the International Monetary System until the collapse of the Bretton Woods framework of fixed exchange rates in 1973, according to the IMF. While the role of Gold Bullion has diminished since then, the fund still holds 2,814 tons and most Central Banks have some on their balance sheets. Russia has also more than tripled its own holdings since 2005.

China is the world’s largest Gold Producer and is currently ranked only behind India among the top consumers last year, but the amount of Precious Metal its Central Bank last reported holding in 2009 accounts for just 1 percent of foreign-exchange reserves, which have surged more than fivefold in a decade and are now the biggest in the world, and most of that is in Dollars.

The IMF estimates the U.S Dollar makes up 63 percent of World Central Bank holdings, while the No. 2 currency, the Euro, accounts for 22 percent. Data from the Society for Worldwide Interbank Financial Telecommunication showed that U.S Currency was used for 43 percent of global payments in February.

Approved Programs

While China is promoting the Yuan internationally, Swift data show the currency was used for only 1.8 percent of international payments in February. Private investors — both Chinese and non-Chinese — can move their money in and out of the country only through approved programs and in limited amounts, and changes in the currency’s value are only permitted in limited ranges.

Adding Gold and other assets would ease China’s reliance on the U.S Dollar, said Nathan Chow, a Hong Kong-based economist at DBS Group Holdings Ltd. It may bolster the view China has “a currency that’s well backed by a range of different assets,” said Steven Dooley, a Melbourne-based currency strategist at Western Union Business Solutions for Asia-Pacific. “The most-liquid currencies tend to have a wide range of foreign-exchange reserves.”

Market Mystery

With China disclosing so little about its Gold hoard, finding out how much the Central Bank has in its vaults is of greatly increasing interest to traders. Confirmation of bigger holdings would signal the importance of the metal as a reserve asset and boost market sentiment, TD Securities’ Melek said. At a time when prices are languishing, the buying could give support, said Suki Cooper, director of commodities at Barclays Plc in New York.

Gold Bullion climbed from $882.05 an ounce at the end of 2008 to a new record high of $1,921.17 in 2011 as investors sought safety from currency depreciation, and the threat of growing inflation. Gold prices then plunged 28 percent in 2013 which is widely speculated as being caused by a highly manipulated and massaged paper futures markets to maintain a degree of appeal in the now highly volatile U.S Dollar.

Gold now trades at around $1,200 in today’s paper markets, but that benchmark could change very quickly, if it is finally revealed to the world that China’s true Gold reserves are significantly higher than what the world had expected them to be. There is no-doubt that China has been hoarding Gold in recent years, all while the depressed market prices kept falling in China’s favor, and they just continued to accumulate Gold as quickly as they could.

More Scope

“I wouldn’t expect a huge jump in Gold holdings,” said Andy Ji, a currency strategist and China economist at Commonwealth Bank of Australia in Singapore. Ashish Bhatia, the World Gold Council’s director, Central Banks and public policy, in New York, said there’s a lot of room for China to expand. It’s ideal for Central Banks to have 4 percent to 10 percent of assets in Gold, he said.

The PBOC may already hold at least 3,000 tons, said Warren Hogan, chief economist at Australia & New Zealand Banking Group Ltd. in Sydney. “Gold has always been, through the history of China, a way to project power,” Kenneth Hoffman, a metals and mining analyst at Bloomberg Intelligence, said in an interview on April 9. “They are thinking about how to make the Yuan more international, and so this is a possible reason why they are buying up so much of the world’s Gold.”

Authors: Jasmine Ng, Joseph Deaux, and Eddie Van Der Walt

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