Wikinvest Wire

China on gold - stating the obvious

Tuesday, March 09, 2010

Reuters reports on comments made by China's top foreign exchange manager at the annual gathering of the National People’s Congress in Beijing on the subject of gold purchases.

Yi Gang, head of the State Administration of Foreign Exchange, said that while gold was "not a bad asset," it would never become a big part of China's overall investment portfolio.

"The international gold market is very limited. If I purchase gold on a massive scale, it will definitely push up global gold prices," Yi said at a news conference on the sidelines of China's annual parliament.
China's $2.4 trillion in foreign currency reserves and its relatively small gold holdings have fueled speculation the country is continuing to buy, although officials have insisted that any increases have come from domestically produced gold and the international price is too high.

"It is, in fact, impossible for gold to become a major investment channel for China's foreign exchange reserves. We have 1,000 tonnes now, and even if I double that holding, according to current prices, that would be about $30 billion," Yi said. "It would just increase the level of gold (in China's reserves) to about 2 percent from the current 1 percent."
They're damned if they do and damned if they don't and the numbers involved are not likely to get any better before they get worse.

Absent a dip in the price of gold back down below $1,000 an ounce (at which time, they'll probably snap up that 191 tonnes of IMF gold), they'll probably just keep adding to their gold reserves quietly and, as they did last summer, announce long afterward that they have made substantial additions to their holdings.

As noted by Yi above, at current prices 1,000 tonnes of gold costs about $30 billion, however, not only is that $30 billion only about one percent of their foreign exchange reserves, the corresponding 1,000 tonnes of gold is the equivalent of almost half of annual mine production around the world, or nearly one-third of global supply for the entire year.

They simply can't make large purchase on the open market without pushing prices significantly higher, but they clearly want to buy more and should buy more, a point that should be obvious to any sensible public official whose country goes on continuing to accept money backed by nothing more than faith from trading partners around the world.

While the above comments were really just stating the obvious, Yi went on to note the long-term performance of gold, offering the following:
"Gold prices in recent years have risen very nicely, but if we look at the price over the last 30 years, gold prices moved in great swings," he said. "So as an investment, its yield is not very good from a 30-year point of view."
This is quite an interesting comment indeed.

By now, a full ten years into the commodities bull market, everyone knows that gold's 30-year track record is unimpressive but, if you go back another 10 years it is very good - as good or better than just about any other asset class.

One could argue that he is simply restating what has passed as conventional wisdom amongst financial advisers in the West for decades - that gold provides no return and is a largely useless artifact of an early, outdated system - or, this could be one more in a series of gold-bashing comments by a government that desperately wants to exchange more of its dollars for gold, preferably at lower prices.

Not knowing anything about Yi Gang, it's impossible to know what his motivation was, but the fact that China is run by engineers makes me think that it is more likely the latter explanation (talking the price down so they can buy more) rather than the former (the hopelessly naive view of most economists and politicians in the West who don't realize that we're on the back end of another experiment with pure fiat money that has gone horribly wrong and will end like all the others before it).

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Alex said...

The Chinese are always uninterested in gold. And yet their gold holdings have been going up massively.

As I see it, all they really have to do is tap into their domestic production, and (likely continue to) keep buying at the mines' back door.

And of course, there is always the chance that other countries will act foolishly, and sell more of their reserves.

Frankly, I liked an idea I heard awhile ago, of using copper as their reserve metal. Or how about a basket of nonperishable commodities?

Anonymous said...

I'm not an expert on what I'm about to say (but who is?)
'Another' (see FOFOA) was a financial guy who claimed that the futures gold market was created so the Saudis could trade oil futures for gold futures, which could both be taken in delivery at some future date. This quietly kept the gold price from shooting up: good for both the Saudis and the Fed. This was about ten years ago, so it may have changed.
Today, getting delivery might be difficult, but it shouldn't increase prices unless there is a true shortage of bullion sellers.
So perhaps the Chinese have gotten into this game? There are many times the amount paper gold futures than actual gold, so if they bought futures it wouldn't affect the price very much. They could then demand delivery, or take a premium and roll it over for even more gold futures.
This way a steady flow of gold will be delivered to China without anybody really knowing. Add this to all their domestic production, and what citizens buy on the open market. Good for everybody?

But What do I Know? said...

I feel much better about gold when the Chinese say they aren't interested in it. What makes me nervous is when they say they are.

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