China Plays a Role in the Gold Market, How Important?
China has been accumulating Gold over the past 10 years, and it is also the largest producer of Gold in the world and perhaps the world’s biggest consumers of the precious Yellow metal.
The World Gold Council’s (WGC) data for Q-2 Y 2017, says China accounts for about 28.6% of the jewelry demand, and for about 26% of total bar and coin demand. And China, and with its almost 1843 tonnes, owns the 5th largest Gold reserves in the world.
The largest market places for Gold in the world are London and New York, and it is in these markets that the price of Gold is set daily.
The share of Chinese investors operating on these markets is unknown, but analysts believe that Western investors, and/or Western institutions are the Key players in the Gold market.
Many analysts speculate that China’s Gold reserves are much higher than the official number, somewhere between 20,000 and 30,000 tonnes.
It might be true, but it does not matter for Gold prices, as they are shaped not by stock piles, but by flows of Gold.
And the central banks’ purchases, including transactions of the People’s Bank of China (PBOC), are simply too small compared to the total volume of trade to support the price of Gold.
The Big Q: If China reveals its true gold holdings, the Gold price would jump, yes?
The Big A: Not necessarily.
Recall, in July 2015, when the PBOC announced an almost 60% rise in its Gold reserves since Y 2009, the price of the precious Yellow metal declined in response. The markets look forward, not backwards.
China plans to use its Gold reserves to back the RMB Yuan, and many believe that if a Chinese Gold-backed currency is widely adopted, the price of gold will soar.
Might, but this is not going to happen in the foreseeable future, as Gold accounts for just 2.4% of China’s foreign reserves. That it is not enough to back the currency.
Even if the real stockpile is much larger, it will be not sufficient link for RMB Yuan to Gold.
Note: the IMF prohibits member states from fixing currencies against Gold now.
About 70% of Chinese Forex (foreign-exchange reserves) are held USDs. And the country is 1 of the largest official holders of US assets in the world. The developments in these enormous foreign exchange reserves are presented in the chart below:
So, for now it is not in China’s best interest to challenge USD. Actually, China has a long tradition of fixing RMB Yuan against the USD at a mark supporting its exports.
The chances that China will abandon its 60 years long cheap policy and back the RMB Yuan by Gold, are low.
There are 3 determinants for international currency status, they are:
- Economic size
- Confidence in the currency, and
- Depth of financial markets.
China has a problem with the 3rd factor now.
According to Jeffrey Frankel from Harvard University, “it is not fully ready to open its domestic financial markets and let the currency appreciate.”
This is why RMB Yuan’s share of global central banks’ holdings of foreign reserves is about 1%. And only 16% of Chinese trade, and less than 2% of global payments are settled in RMB Yuan. Hence, RMB Yuan has a long way toward challenging the USD, but China is working on it.
That being the case now, precious metals investor should be more concerned about the real interest rates rather than China’s Gold demand and the talk about RMB Yuan replacing the USD as the world’s reserve currency for now.