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China Boosts Its Gold Reserves By 57% For the First Time In Six Years
News that China has announced an increase in its gold reserves for the first time in more than six years is getting mixed results among analysts, who add that they are not surprised that it is not having an impact on prices.
According to media reports, the People’s Bank of China (PBOC) increased its gold reserves overnight by 57%. The central bank’s gold holding now sits at 1.658 tonnes, making it the fifth biggest gold reserve in the world, surpassing Russia.
The news comes after months of speculation and rumors that China has been quietly buying gold as prices have declined. However, the news does not appear to be impacting prices as analysts noted that the news is mostly backward looking.
“This news just tells us what has already happened,” said Julian Jessop, head of commodity research at Capital Economics. He added that given that it has been six years since China has updated its reserves, and given the significant drop in prices since 2011, it is surprising the bank has not bought more.
Jeff Christian, managing director at CMP Group, said that although its big news for the gold market, it could also be seen as extremely bearish as it shows that the central bank has bought 19 million ounces at some point within the last six years.
“It is a fairly substantial amount but you can look at it that even though they bought all this gold, prices still fell 30%,” he said. “If they can buy this much gold and prices still go down, it is just another reason to be bearish on the gold market.”
Jessica Fung, commodity analyst at BMO Capital Markets, also explained that although China has made a significant increase in its gold reserves, it is still only a small portion of its total foreign reserves. She wrote in a note to clients Friday, “ gold as a percentage of China’s central bank total reserves remains little changed at 1.66% (at April 2009, based on prevailing gold price of US$905/oz, gold holdings represented 1.53% of total reserves). “
Analysts at UBS said that market participants probably need time to digest the news as it is unclear if this is a new trend with China’s central bank. In its note to clients, the Swiss bank provided a translation of the PBOC’s announcement.
“Gold reserves have always been an important part of reserve management and diversification. Most central banks hold gold, including ourselves. Gold is a special asset, has the properties of financial and commodity products. Like other assets, it helps improve asset allocation of reserves and overall risk characteristics. Over the longer term and from a strategic perspective, [we will act] according to need, dynamic allocation of reserves and protection of international reserve security, liquidity and valuation protection/increase,” the PBOC said, as translated by UBS.
The analysts added that the statement is unclear as to whether or not China will continue to buy gold, or that it now deems its reserves sufficient. However, they added that because the central bank’s gold reserves are still just a small part of its reserves, they do expect to see more buying in the future.
“Gold’s proportion of China’s total reserves is still small at 1.6% and the diversification argument remains valid,” they said. “A slower pace of buying would be in line with our overall expectation for official sector gold activity up ahead.”
Fung also noted that there is a strong argument for China to continue purchasing gold.
“There remains speculation that China’s bank holdings of gold as a portion of total reserves needs to increase if China wants to unpeg its currency from the U.S. dollar. If this is the case, we may see a more regular release of gold holdings in China; otherwise we wait another six years for the next update,” she said.