China Piling Up Gold; Has Bought $26 Billion Worth Since 2009

China Piling Up Gold; Has Bought $26 Billion Worth Since 2009

China has apparently caught the gold bug. Investors and analysts have been wondering just how much of the precious metal gold the Chinese government has been buying for some time, and that question was finally answered late last week. It turns out that China has bought close to 26 tons of gold since 2009, around 604 tons. That amount is second only to the nearly 700 tons that Russia purchased over the same six year period.

China’s gold reserves

According to the most recent data released by China, the nation’s gold reserves currently stand at around 1658 tons. That places China in fifth place overall worldwide, just behind France and ahead of Russia. Of note, the U.S. has the largest global gold reserves by far at more than 8000 metric tons.

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China likely to continue its gold buying spree

After the Bank of China updated the data on its gold reserves for the first time in six years last Friday, a number precious metals analysts suggested it is quite likely that China will continue to buy gold for some time.

Robin Bhar, an analyst at Societe Generale, says China’s gold reserves may eventually reach over 5,000 tons.

“China hasn’t been very open about its strategy, so what matters now is whether the market believes they intend to continue buying,” noted Joni Teves, an analyst at UBS in London. “They do appear to leave the door open to further purchases, which should limit the downside for gold.”

The 100 ton annual gold purchases from China represent around 2% of global demand, and there’s “significant scope” for more Chinese buying, the World Gold Council said Friday. Note that the 100-ton figure refers to government purchases, and does not include gold bought by individuals or businesses.

100 ton per year rate of Chinese gold buying not as much as some expected

“We can’t be sure about what China is going to do, the evidence is that they have been buying at a far lower pace than the bugs were expecting,” Leon Westgate, an analyst at ICBC Standard Bank, explained iin a phone interview. “There is no way that the PBOC will ever maintain gold as a fixed percentage of foreign reserves.”

Analysts from BMO note:

The total holdings represent a 57% increase since 2009, or approximately 3.28Moz/year (102t/year). On an annual basis, this represents approximately 25% of China’s estimated domestic mine supply.
So far there has been little gold price reaction to the news. Partly because this is backward-looking, and partly because 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).

There remains speculation that China’s bank holdings of gold as a portion of total reserves needs to increase if Chinawants to unpeg its currency from the U.S. dollar. If this is the case, we may see a more regular release of gold holdingsin China; otherwise we wait another six years for the next update.

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