Metals Notes

China, The Gold Story of 2013

Originally Posted Jan 6, 2014 –

Looking back at 2013 what was the most significant story in precious metals? In my opinion it’s clearly China’s continued growth in its physical gold reserves following a trend that started in 2009..Here are the numbers.

Source: Mineweb.com & Bloomberg – Note: 1 metric tonne = 32,151 Troy ozs.

Combining mined and imported gold, China has accumulated almost 4300 metric tonnes of gold since 2009, approximately 1400 of which in 2013 alone. It’s interesting because it appears the Chinese viewed the +20% ‘slam down’ of the gold spot price during 2013 as an opportunity to increase gold imports. Numerous sources including Mineweb.com and Bloomberg have mentioned that virtually the entire supply of physical gold now sold by the West is ultimately ending up in Chinese vaults. It’s estimated that China consumed over half the world’s entire available physical gold supply in 2013.

Currently China sits at #5 in total gold reserves. Yet it should be noted that the secretive Chinese last reported its official reserves in 2008. Therefore its actual reserves are approximately 5300 metric tonnes making it #2 in gold reserves behind the USA.. At its current pace China will overtake the US in total gold reserves within next five years.

Source: World Gold Council

Three things either alone or in combination are driving China’s thirst for physical gold:

1. China is currently the largest holder of U.S. Treasury Debt, a mind numbing $1.3045 trillion, It’s possible that the Chinese are hedging their bets on Washington’s ability to meet future interest payments.

2. Others like the World Gold Council speculate that China is positioning their currency, the Renminbi, as part of a future gold backed multi-currency reserve alternative to the US Dollar. I do not see this as a real factor yet. China has too much to lose if a new reserve currency were to drive down the value of the US Dollar. A weak US Dollar would cripple the economy of China’s #1 export market and create potential for US debt default. If China starts to unwind its US Debt holdings and continues growing alternative markets for their exports then their potential pursuit for a new gold backed reserve currency becomes more realistic.

3. Currency debasement is the most likely motivation. Countries worldwide, especially the US and Japan, are driving down the value of their currencies to gain an advantage for their exports. China could and I believe is most likely hedging their international currency exposure while positioning itself for the possibility of much larger troubles further down the road.

Look for China to continue growing its physical gold reserves into 2014 and beyond.