Koos Jansen
BullionStar Blogs
Koos Jansen
Posted on 14 Feb 2014 by

Guest Post: Thoughts Behind PBOC Gold Purchase Policy

Written by one of my sources in the mainland, LK:

In the early parts of 2009 without being anticipated, China came forward and announced that its official gold reserve had leaped from 600 tons to 1054 tons. They haven’t announced any changes since then. This lack of communication is usually said due to the wish not to disturb the market (so they can buy gold more cheaply), but I found an article by Chinese gold analyst and columnist Xiao Lei last month suggesting much more thoughts are given by the Chinese authorities to this strategy. We have not seen this view being discussed in the English speaking world.

Xiao Lei
Xiao Lei

A few more words about 2009

That the PBOC should be, and has been, buying gold as a strategic reserve asset is no secret. Officially, the 454 tons increase in 2009 was done over the years since 2003, but Xiao Lei believes that it might have been amassed quickly from 2008 Q4 through to 2009 Q1 during the markets sell off (when gold fell from $1000 to $700 an ounce).

The 2009 announcement was interesting. In Xiao Lei’s words:

This high-profile announcement served the purpose of demonstrating China and the world that the PBOC has the capability to both stabilize and protect its financial markets (that depends on trust). It has indeed been increasing its gold reserve steadily, thus accumulating that one asset which the financial systems can ultimately depend on should all else fail.

The action not only showed a good quick return (at $900, even before the full price recovery), but also won much accolade and public encouragement within the country for the central bank to continue its gold-buying program. And for those who took note this was an endorsement, all said and done without disturbing the price.

This is the type of cues and support we should be watching for from China!

2009 to 2011

This bull phase saw the gold price double. Xiao Lei thinks that during this period, the PBOC has gone to the market at least 3-5 times. Other developing nations were also buying and declaring their increases, all in all leading to higher acquisition prices. If China were to announce a higher holding level now at about $1250, Xiao says that the central bank would face some pressure from public commentators it would rather do without.

During this time, different members of the PBOC senior management have repeatedly mentioned that gold purchases should only be done at opportune times without disturbing the market. YI Gang, the Director of the State Administration of Foreign Exchange and Deputy Governor of the PBOC, even said that China is a big gold country already and if the PBOC buys too much, it would lead to higher prices for China’s gold-consuming citizens, whether for wedding dowry or new year tradition, and this would not be good. All these suggest that the PBOC has now become mindful of its shadow in the market unlike before. It also paints a central bank that is sensitive to public opinions – something we are not used to seeing anywhere.


2013 The Stars Lined Up

The bear market from 2011 is almost a god send to the mandarins tasked with amassing the gold hoard. The market came to them without the aforementioned shackles:

1. Calls for foreign exchange reserve diversification were gaining momentum

This referred to the internal opinion within the country. Holding on to US Treasuries came under increasing pressure in media discussions, sometimes even turning accusatory. With the official gold reserve percentage so low, it is hard not to do anything but.

2. Shanghai Free Trade Zone (FTZ) received approval in 2013. RMB internationalization would be much more rapidly achieved with gold trading.

Gold is an international standardised commodity with plenty of liquidity. With gold, China does not have to open up its internal securities and debt markets for trading (which are not ready), and still has plenty RMB to use as unit of account and currency for trade. There is already a 2000 tons vault in the FTZ open for business (and the USD-denominated gold board has NOT received approval).

3. Liquidity and lower cost of gold purchases

As gold is a long term strategic asset, the price of gold is not an absolute concern on the books. As long as the acquisition does not cause a serious price reaction, the acquisition is a success. This is how it is viewed.

4. Cover from the “Dama” Aunties!

Because of media scenes of the wet market aunties flocking to and queueing up at the gold stores buying up everything, attention was well diverted away from the true needs of the PBOC to buy gold. Xiao actually wrote that PBOC’s buying did not raise concerns with the international monetary bodies and the markets just took the buying as regular consumer behavior, barely noticing the official sector, with the exception of a few specialized analysts (that’s you and us!). Moreover, there is no way of telling how much of the gold supplied to China will be ending up at the PBOC.

5. Trend of the time in history

Germany is being given the cold shoulder. The big direction is certainly to get your own gold and back on your own ground. So buying in size is in fact along the path of least resistance, the trendy thing to do.


As few realize that gold is a strategic asset in national security, few must realize that the announcement of gold reserves of a major country is also an important strategic decision that will only come from the highest of ranks. The deep implications this has on prices, perceptions and what it may provoke from the other players makes this an important card that will only be used casually by incompetent fools.

Through this article, we have learnt something about China’s internal interactions on this matter and what issues the PBOC is having to find itself sensitive to. The author Xiao Lei further remarked that not only will the timing and situation of the next announcement be carefully chosen, the actual level that will be announced will be decided with reasons too – meaning that the full holding will unlikely to be all plainly divulged.

2013 was in many ways a total bonanza, and one would be very naive to think that the PBOC would pass up on this golden window given their good understanding of the subject as seen in various speeches and writing within the nation!


Koos Jansen
E-mail Koos Jansen on:

  • Hugh

    I think the secret’s already out. If the PBOC announces some small/unrealistic holdings of gold, internationally it will just be deemed a central planning lie.

  • http://google.com/+TiongHumSoh Tiong Hum Soh

    Sun Tzu

    All warfare is based on deception. Hence, when we are able to attack, we must seem unable; when using our forces, we must appear inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near.”

    • Hugh

      It’s difficult to fight a war with a perceived opponent who would rather love than hate.

  • 24 carat

    Strange, that Xiao Lei is not referring to the ECB’s concept of gold as a strategic asset on its balance sheet !? The ECB announces each quarter the book-value of its strategic goldreserves, marked to market. Russia let the world know how much goldreserves its central bank is buying/selling. Does this affect the goldpricing (and gold perceptions)? India never stopped accumulating physical gold within its borders (estimated 20,000 metric tonnes).

    WHY must the PBoC remain so secretly about its goldreserves ?

    This high-profile announcement served the purpose of demonstrating China and the world that the PBOC has the capability to both stabilize and protect its financial markets (that depends on trust). It has indeed been increasing its gold reserve steadily, thus accumulating that one asset which the financial systems can ultimately depend on should all else fail.

    When do we (the goldreserve accumulators) conclude that everything else is failing ? How will gold then come – in play – ?
    China’s put on the goldprice is already known since the Central Bank Gold Agreement goldreserves (WAG-gold) of the European System of Central Banks started moving to China.
    What exactly is a – disturbing goldprice – for WHO !? How is it affecting currency exchange rates (€/yuan-$). Isn’t the free floating $-standard currency system already disturbing the world’s balances !

  • Any Old Irony

    There are only 3 possible scenarios, and it is relatively straightforward to apply Game Theory to analyse the most likely outcome –

    1. China announces unchanged Gold reserves – nobody believes it (nobody ever pays attention to news about China which doesn’t fit the preconceived notions they have been conditioned to believe – GDP unless it falls, train systems unless they crash, space exploration unless it malfunctions). Consequently the Accepted Knowledge continues to be the China continues to massively and secretly amass a huge pile of Gold – probably with the support of JP Morgan, “TPTB” and, I don’t know, maybe Justin Bieber. Just make something up – if you don’t, somebody else will

    2. China announces Gold reserves of 5,000 tonnes. Or 10,000 tonnes. Or 100,000 tonnes. Any number you like. Speculation will increase that this is evidence of China’s intention to take over the World, and that the RMB will jump upwards in value (except that it can’t, so long as the PBOC and SAFE control the capital account and thereby international availability of the RMB). Gold will suddenly start trading violently towards nowhere in particular, because nothing has in fact changed. Once the flurry of excitement subsides, commentary will revert to the tried & trusted mantra of how China’sSHADOW Banking System is going to collapse its economy and lead to civil unrest and an end to the horrible horrible Commies and and and as usual. Ignore the fact that the Investment Trust default that occurred last week (reported on KWN as “massive” ) was for $49 million, compared to e.g. $22 billion paid in fines by JP Morgan alone. China = Bad News – please try to keep up with the script. Remember – it’s a “shadow” banking system – and doesn’t that sound far afr more scary than using the word “Trust”?

    3. China continues to do what is best for China, keeps its powder dry, and let’s Russia make the running – economically via the commodities and petrochemical sectors, and politically via Syria, Iran and Ukraine. What incentive is there for China to up the ante? – as Napoleon once observed, it is rude and unnecessary to interrupt one’s enemy when he is making a mistake, and whilst China, Russia and the SCO may indeed have plans for a new currency unit, what it the imperative to declare it right now? Things are going quite nicely, thankyou very much – a few more years of Abenomics and Japan will have imploded, a few more years of “Bad Weather” and QE and the US$ will be toast, a few more Italian withholding taxes and the EU will be begging, and all the time those investments in Latin America and Africa are coming along quite nicely thankyou. Why rock the boat by announcing anything? Why would the PBOC give two hoots what anyone in the West thought of their Gold reserves?

    We live in a world where the USA’s manufacturing PMI is allegedly in the upper 50’s, and China’s is collapsing (due to a single recent dip in a sequence of historically noisy data); where 7.7% GDP Growth (above target, above analyst expectations, and precisely the same as 2012) is reported as “the lowest ever”; where China’s Credit Bubble is going to collapse itseconomy – just like it is supposed to do every week – despite the fact that it is all domestic, owed by local governments and SOE’s, and denominated in RMB, while the PBOC has almost $4 trillion of reserves available on hand if necessary. In contrast, the USA is booming – with employment participation rates back to where they were in 1980 and inflation-adjusted median incomes unchanged since Nixon came off the Gold standard in 1971

    China has no obvious interest in making any announcements any time soon – in the greater scheme of things, the accumulation of Gold is a sideshow (and for the West, a convenient distraction from the real hard economic facts of life in the 21stt century), and whilst diversifying its reserves away from the US$ is a sensible idea, it is the size and existence of those reserves which is the key indicator of China’s economic clout, not what they are invested in.

    In closing – watch Nigeria; last month they started using the RMB as part of their currency reserves, and today, hey presto, there is a “terrorist” insurgency in the North of the country. Did anyone say “AFRICOM”?

Copyright Information: BullionStar permits you to copy and publicize blog posts or quotes and charts from blog posts provided that a link to the blog post's URL or to https://www.bullionstar.com is included in your introduction of the blog post together with the name BullionStar. The link must be target="_blank" without rel="nofollow". All other rights are reserved. BullionStar reserves the right to withdraw the permission to copy content for any or all websites at any time.