China’s Gold Reserves Are Not Bullish…Really

We have already written that China updated its official gold holdings. However, because there are still a lot of misunderstandings about the impact of this event on the gold market outlook, we will examine this issue in a more detailed way.

For years, many gold bugs have been speculating that China had probably tripled or quadrupled its gold reserves, which was to boost gold prices when revealed. Unfortunately, the official gold holdings rose only by 57.33 percent. Surprisingly, it did not upset some analysts, who reversed their argument and are saying now that the fact that the Chinese have bought so little is great news, because it means that they have a lot more gold to buy.

 No, it is not. The muted demand in the past does not imply higher demand in the future. It does not work like that. Moreover, the harsh reality is that the market value of China’s official gold holdings as a percentage of total holdings of reserves declined from 1.8 percent in April 2009 to 1.65 percent. Let’s emphasize this fact: China reduced the importance of gold in its portfolio. The country favored the accumulation of fiat currency-denominated assets (China increased its non-gold foreign exchange reserves increased by almost 85 percent from April 2009). Well, that’s it for all this speculations that China is going to back yuan by gold and dethrone the collapsing U.S. dollar. No, it is not going to. The country increased its gold reserves by 57 percent, while the money supply by 120 percent from April 2009, which means that yuan is far less backed by gold than six years ago.

Many gold perma-bulls simply claim that Chinese are lying and there were also comments that China may have been “lowballing” the size of its holdings to maintain confidence in the dollar. Of course, the governments are generally awful liars, but why would China under-report its gold reserves? The higher gold reserves, the more powerful country looks like. The same analysts who now are denying the numbers, earlier were expecting huge increase in gold reserves in order to impress IMF and get yean included into SDR basket of global reserve currencies. And the same analysts claim that the U.S. over-reports its gold reserves. The theory that China under-reported the size of gold holdings to maintain confidence in the U.S. dollar is really funny given the dominating narrative about the currency wars, yuan replacing the greenback and China building a new global financial order.

The key takeaway is that China’s last update of its gold reserves is definitely not bullish. It showed that the country was only interested in roughly maintaining its percent share of gold reserves. Moreover, given the current developments it is questionable that China will be able to continue its policy of reserve accumulation. Therefore, investors should not base their investment decision on faith in Chinese central bank’s demand. Gold can rally much higher in the coming years, but it doesn’t have to do so shortly and definitely based on gold’s reserves in China.

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Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor