China on Friday finally shed some light on how much gold the country holds within its reserves, much to the disappointment of many gold bugs, but ultimately the news might offer a bullish factor to the market in the medium to long term.
As of the end of June 2015, China’s official gold reserves were 53.32 million ounces (around 1,658 tonnes), the PBoC said – the first reported increase in six years.
According to the World Gold Council’s figures, this is an increase of 604 tonnes since the last time the central bank updated its figures in 2009 and makes China the sixth-largest holder of the metal in the world, overtaking Russia.
The PBOC had previously reported its reserves at 1,054.1 tonnes.
But many market participants appear to have taken the news as bearish for the market, particularly as a large number of popular analysts had quoted figures upwards of 3,000 tonnes, based on domestic output, trade figures and the China Gold Association.
But in reality, the reported increase could actually spell a bullish tone for official sector purchases over the coming months.
Firstly, the market must now decipher whether this increase is the start of a more prolonged purchasing programme, particularly at a time when gold prices are trading at their lowest levels in five years.
“Many people had believed that China had been accumulating gold over the past few years and since they last announced their reserves to a larger extent than shown by their latest update to their official holdings, which has triggered strong selling in the Chinese market,” FastMarkets Tom Moore said.
“Should these low prices, however, trigger the Chinese central bank to build up further reserves as they move to have the RMB accepted by the IMF as a reserve currency, it could become a bullish catalyst,” he added.
China has long been seeking seat at the IMF’s Special Drawing Rights table and is due to meet with the Fund in October to discuss the prospect of having the country’s currency included by other central banks around the world as a reserve asset.
HSBC’s James Steel agrees, “long term, we think the news is bullish, but near term it appears to be neutral at best,” he said. “The PBoC clearly accepts the arguments for gold’s diversification properties and China’s foreign exchange holdings remain massive.”
“This may imply continuing, though maybe gradual, gold accumulation going forward. Thus, the release may be a medium to long-term positive, but may not necessarily impact prices positively near term,” Steel added.
The PBoC is an influential player when it comes to official sector purchasing on gold. It’s possible that the mere confirmation that China has and maybe will continue to be in the market foe gold “may lead other central banks to examine purchasing bullion,” Steel noted.
“When the Reserve Bank of India bought 200 tonnes of gold in 2009, purchases from several neighbouring central banks followed,” he added.
Discounting any retrospective analysis on Chinese buying, offical sector purchases accounted for 566 tonnes of gold on a net basis in 2014 according to Metals Focus data – the second highest since the mid-1060s. Currently, the firm expects net official sector purchases to continue this year at a pace of 100-150 tonnes per quarter.
But based on Steel’s comments, it’s theoretically possible this figure could increase, should other banks take note of China’s accumulation of gold.
UBS’ Edel Tully however ers on the side of caution, “Much would depend on what this announcement means for China’s gold reserves in the future,” she said. “Does this mean that the PBoC now deems its level of gold reserves sufficient? Or is this simply an update within an ongoing, longer-term buying programme? It is also possible that this is a one-off transparency gesture ahead of SDR inclusion talks due to conclude in the coming months.”
Tully says that given China’s prominence in the global gold market, confirming gold purchases while its buying programme is still ongoing could potentially be counterproductive as the news would boost gold prices.
In this scenario, it would therefore make sense for China to announce its gold purchases only after the fact, she said. But Tully also says that on the other side of the argument, in spite of this, gold’s proportion of China’s total reserves is still small at 1.6 percent and the diversification argument remains valid.
Initially there was little action in the market following the news, though as of Monday, gold suffered the much-maligned ‘flash crash’ to $1,085 per ounce, a level not seen since the beginning of 2010.
When the news was announced, China had all but shut up shop for the weekend, though during the early hours of Asian trade on Monday – the gold price began its miraculous drop.
Within a matter of seconds, the gold price shed nearly five percent of its value around 2:30am BST, as scores of Chinese traders offloaded more than five tonnes of metal – pushing the price from around $1,130 all the way down to $1,085.
Spot gold was last trading around $1,110 per ounce, down $24 on the pre-weekend close.
(Editing by Tom Jennemann)
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