China’s gold hunger — and what that means for Beijing’s global financial power

china-the-6th-largest-producer-of-gold.Two news flashes that should remove any doubt about China’s intentions regarding gold — and how it will help Beijing‘s plan to dominate world finance. One, Chinese consumers in 2013 bought gold equivalent to about 45% of global mine output. Two, a new gold futures contract has been launched through the Shanghai Gold Exchange — but there’s a catch: you can pay for the contract only in yuan. You have sell dollars to buy the yuan, in other words, before dealing into the contracts (which may be the first stage of getting the dollar quoted in that currency as well as the U.S. dollar).

But, first, let’s back-track. China is buying gold, of that there is no doubt. The People’s Bank of China in 2009 declared it held 1,054 tonnes of gold. Many observers now think that Beijing’s central bank holds somewhere north of 4,000 tonnes, maybe more than 6,000. My theory: if that is the case, China has overtaken Germany (3,387 tonnes) and is now closing in on the world’s largest holder of gold reserves, the U.S. (8,133 tonnes) Again, if that is the case, my feeling is that China will wait until it has passed America to announce its official holdings — with all the global shock factor that will entail. American international prestige will be further diminished.

There have been reports that official Chinese buying has been occurring during recent price dips and there were suspicions that the People’s Bank of China was the unnamed central bank for which the Basel-based Bank of International Settlements in 2012 bought several tonnes of gold. More recently the China Development Bank announced it would offer loans in yuan to other members of the BRIC grouping, Brazil, Russia and India (China being the ’C’ in that acronym, and to South Africa as well. There were at one stage reports that the South Africa was planning to endorse the yuan as a reserve currency.)

China may be the biggest producer of gold, but still has to import 70% of its needs. So this is why you see reports on Reuters that read “China’s net gold imports from Hong Kong climbed to their second-highest on record in October” at 131.19 tonnes, the sixth straight month of imports over 100 tonnes.

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And why, of course, Chinese companies are buying foreign gold miners. Three months ago China Daily stated this: “China National Gold Corporation, the country’s only central government-backed enterprise in the gold industry, is keen on buying gold mines overseas such as GoldCorp Inc of Canada and Newcrest Mining Limited of Australia”. Newcrest is the largest Australian gold mining company.

The most popular theory is that China is accumulating gold, both as a means of turning its vast U.S. dollar reserves into something more reliable and stable than the greenback, and also as a backing for the internationalisation of the yuan. Gold as currency backing is somewhat more impressive to the rest of the world than the $17 trillion debt now backing the existing global reserve money. However, it must be added quickly, the yuan is now used in just 0.8% of global financial transactions. But don’t see that as diverting Beijing from its course.

As I wrote a few months ago when Goldman Sachs came out with a forecast that gold would fall to around $1,000/oz, “they’ll be clinking champagne glasses at the People’s Bank of China after reading Goldman Sachs’ latest gold forecast. The Chinese central bank will be looking forward eagerly to filling more of its vaults with the metal at bargain basement prices“.

The latest figures from Thomson Reuters GFMS (formerly Gold Fields Minerals Services) shows that the Chinese have overtaken Indians as the world’s largest gold consumer. (Sidebar: gold rose almost 2% Thursday on reports that India was about to relax recent controls on gold imports.)

Chinese consumer demand for gold totalled 1,189.8 tonnes in 2013, up 32% on 2012 (and a five-fold increase since 2003). The Financial Times describes Chinese gold-buying as “frenetic”, helped by the 28% fall in the gold price last year.

Jewellery sales boosted totals. But the newspaper makes this key point: “Because many Chinese buy jewellery for investment reasons rather than adornment, high-purity 24 carat gold products dominated sales”. And another point: purchases of physical bars rose 47% to 366 tonnes, a new record. (That 366 tonnes is getting close to China’s total mine output, and way ahead of what Australia pulls out of the ground.)

The yuan-denominated gold contract is being launched through the new Shanghai free trade zone. According to The Wall Street Journal, traders are saying that the new gold contract could help simplify the process of moving gold into China. The newspaper goes on to add that China is moving more towards trying to control commodity prices: the Bohai Commodity Exchange is planning iron ore contracts, while the Shanghai Futures Exchange has signalled it will develop a crude oil contract. The People’s Bank introduced interbank gold trading in May 2011 as a measure to allow Chinese banks to have greater influence over gold pricing.


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Robin Bromby

About Robin Bromby

Robin Bromby is a journalist, author and sometime publisher who has had titles issued by mainstream publishers, including Doubleday, Simon & Schuster and Lothian Books. Robin began as a cadet journalist in 1962 with The Dominion, the morning paper in Wellington, New Zealand. He also worked for the NZ Broadcasting Corporation, TV1, the South China Morning Post, The Herald (Melbourne), the Sunday Times (Wellington), The National Times (Sydney) and, since 1988, he has been first a staff reporter and now columnist for The Australian and has been a Senior Editor for InvestorIntel since the onset.
  1. Pingback: Debates, Deceptions, Detonations, and Davos | OccurrencesDomesticForeign

  2. Excellent article and research on what China is doing and the ultimate checkmate move on the US dollar. As the US Federal Reserve continues to print new money in order to stimulate the economy, they are only delaying what is inevitable and that is, the US needs to cut their budget and tighten their belts in order to stop the fiscal bleeding. China knows that the day will come when the US dollars with be deflated and is collectively gathering as much Gold as they can at reasonable prices. Also, the Central banks continue to add to their positions which means less inventory available. Then, there is the question of whether their really is a stockpile of Gold under the streets of NY at the Federal Reserve? You guess is as good as mine! Wink!

    comment by John Guchone- Amplius Group

  3. Gold, after decades of being in the wilderness since the abandonment of the gold standard, is now again being seen as the basis of monetary systems. That is why the Asians are buying (and holding on to) all the gold they can get.

    Looking back now, we see that the comments made in early 2010 by World Bank president Robert Zoellick signalled that new era. He had penned an article calling for a new Bretton Woods system, using gold as a reference point for judging inflation, deflation and currency values.

    Too many people think of a gold standard as the straitjacket that existed until the 1930s. But we are headed for a new gold standard; we don’t know what it will be, but he yellow metal will play a key role in the global financial system.

  4. I’m not sure specifically in the case of China, but much of the gold in the basement of the New York Federal Reserve belongs to other countries. When it is bought or sold, the Fed merely makes an entry reflecting the change of ownership. Basically changing the virtual hang tag on the gold bars.

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