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.
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!