China Goes for Gold as Central Bank Expands Reserves
December 10, 2015 (Source: WSJ) — Gold may have crashed to multiyear lows as the strengthening dollar spooks investors, but the bearish sentiment hasn’t daunted one quiet operator: China’s central bank.
After six years of revealing nothing about its gold reserves, the People’s Bank of China surprised markets in July by announcing they had risen by more than 50% since 2009 to 1,658 metric tons. The central bank has been steadily scooping up more of the shiny, yellow metal since, with its reserves rising another 5.1% to 1,743 metric tons by the end of November.
Some believe that without such central-bank support, gold might have already fallen much further. Gold is currently trading around $1,074 an ounce, close to a six-year low.
“Had it not been for China and Russia’s central banks buying cheap gold, the price would have gone below $1,000 dollars an ounce,” said Bill Hubard, chief economist at Bullion Capital, a global physical bullion exchange.
The PBOC didn’t respond to a request for comment on its gold buying. But analysts say it likely has a few motives, including a desire to plow its vast foreign exchange reserves into a broader range of assets and to follow other leading global central banks in building up gold reserves as a store of value.
The bank’s gold holdings are currently only equivalent to 1.6% of its forex reserves, much lower than those held by Western central banks, many of whom keep more than 60% of their reserves in gold, according to Ross Norman, chief executive of London-based gold brokerage Sharps Pixley Ltd. China’s gold reserves are about 20% of those held by the U.S. Federal Reserve.
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“We would not be surprised to see purchases by China’s central bank for many years to come as they are underweight in gold for an economy of its size,” Mr. Norman said, adding he expected the PBOC to keep buying gold when prices dipped.
China’s move to buy more gold this year may have been driven in part by its successful push to have its currency, the yuan, accepted as a global reserve currency by the International Monetary Fund. With more gold in the central bank’s coffers, investors could have more confidence in holding the yuan, analysts said.
“We believe that Chinese accumulation of gold reserves will continue as a means of diversification of reserve holdings as well as a signal of strength,” said Seamus Donoghue, chief executive of Allocated Bullion Solutions, a Singapore-based international bullion trading network.
The PBOC isn’t the only central bank that has been stocking up on gold.
Russia has now accumulated the seventh-largest reserve of any central bank at 1,352 metric tons, putting it one notch below China. The country expanded its gold reserves by 77.2 tons in the third quarter, according to the World Gold Council.
Like the Chinese, the Russian central bank is rapidly divesting U.S. dollar assets, said Mr. Norman, of Sharps Pixley.
“The Russian rate of accumulation in 2015 is steepening and we see plenty of scope for this to be maintained,” he said.
Other central banks boosting their gold holdings include those in the United Arab Emirates, Ukraine, Malaysia, Kazakhstan, Jordan and Belarus.
Despite the heavy central bank buying, gold prices are primarily determined by traders buying and selling on electronic platforms, as well as by consumer demand for jewelry, particularly in India and China.
Analysts believe prices could yet fall below $1,000 an ounce if the U.S. Federal Reserve moves ahead with an expected rise in interest rates next week. A Fed rate increase would likely strengthen the dollar further: Assets priced in U.S. dollars tend to fall when the dollar rises as they become more expensive for overseas buyers.
“If the Fed rate hike comes to pass, gold should touch $1,050 per ounce,” said Barnabas Chen, an analyst at OCBC Bank. He said gold could drop even further to $950 an ounce by the end of next year if the Fed continues with rate increases.
Raj Shah has professional experience working for over a half a dozen years at financial firms such as Merrill Lynch and First Allied Securities Inc., ... <Read more about Raj Shah>