China’s August gold reserves

Last week we wrote about the possibility of a US government shutdown in the event that an agreement on funding was not reached by the deadline. It appears overnight that the US Senate has indeed passed a spending bill by 78-20. Coming so close to the wire seems to be somewhat normal these days so instead today we move our focus to China to look at their latest gold reserve holdings which were released yesterday.

Since June, China has adopted a more transparent approach to its gold holdings by reporting monthly acquisition figures to the IMF as part of its campaign to see the yuan included in the SDR (Special Drawing Rights) currency basket which was created in 1969 as an international reserve asset to support the Bretton Woods system that collapsed only a couple of years thereafter.

The numbers released yesterday show further increases in Chinese gold holdings which now stand at 1693.5 tonnes, up nearly 16 tonnes on the July tally. In July, China acquired just under 19 tonnes for its reserves so the latest number represents a slowdown in acquisition. It is worth nothing however that the reduced rate of acquisition aligns with the liquidation of foreign exchange reserves in an effort to support the currency as we have previously covered. In such a scenario it is not uncommon to expect gold acquisitions to cease or even turn negative so the August acquisition is still a bullish indicator for gold.

For some context, according to the World Gold Council, China’s gold reserves represent only 1.6% of its foreign reserves with the US at 73% and Germany at 67%. This low allocation is one reason why many economists are predicting that China will continue its acquisitions. Jiang Shu, chief economist at Shanghai’s Shandong Gold Group supported this idea by saying “The PBOC will increase its gold reserves continually” suggesting that the pace of gold acquisition by the central bank would continue at a relatively constant pace with the caveat that any significant drops in pricing would see China’s gold acquisition rate ramp up.