Just How Much Gold Does China Have, Anyway?
To get the bad news out of the way first for gold investors, let us say that the precious metal has failed to carry its weight through 2015. Perhaps that's an understatement, too, for gold has done nothing but go down ever since the metal hit its peak of $1900 per ounce back in 2011 and today trades on the commodities market at five-year lows. While investors have scurried away from gold with due haste, many nations across the globe have decided to double down on their gold holdings, to the point where we're not quite sure how much gold any individual nation actually possesses. Such is the case with China, the great red enigma, who raised their gold reserve holdings for the first time in six years through 2015, tacking on some 600 tons of gold, about $20 billion in raw value. Even with this news, a welcome source of demand for gold investors, we cannot be sure just how much gold China keeps under their beltloops, making this appear to be good news on the surface but a question mark since there's no way to determine whether the figures represent an accurate tally.
The Chinese want a solid supply of gold to back up the yuan just as we keep a lot of gold at Fort Knox (nearly 5000 tons) in order to back up the dollar. The difference between Fort Knox and the Chinese reserve, however, is that a simple Google search will tell you how much precious metal the US retains while the Chinese only release holdings reports at about the same frequency of Olympic games. It's been six years since the last report from the People's Bank of China, the nation's ministry of currency, since they prefer their economic doings to be secret enough that foreign investment will continue without being able to speculate, similar to how the nation opened up the Shanghai stock exchange with the stipulation that foreigners could not short sell Chinese stocks. This secrecy has created all types of speculation on the People's Bank holdings, with economists suggesting that as much as 3000 tons could lie behind their vault doors. The July publication of the real figure, though a 60% growth from the 2009 data, suggests the Chinese economy has room to grow but hasn't increased as much as the Politburo (or companies that depend on Chinese goods or markets) would like. Brien Lundin of Gold Newspaper openly critiqued the Chinese government in an editorial, questioning why trade data suggests China has more gold within their keeping than their reports suggest. The best guess so far? Because China wants to become the gold center of the world.
Changing Attitudes, Changing Markets
Up until 2006, South Africa held the unquestioned title as the world's greatest gold producer, in addition to producing more diamonds and platinum than any other country. Just about everything that could go wrong in South Africa has, however, causing the emerging economy of the nation to the brink of collapse at the same time that China enjoyed a decade of double-digit GDP growth. The Chinese rocketed past the competition to become the world's leading gold producer, mining about 500 tons per year, or 50% more than second-place Australia (the US comes in at 4th behind Russia with about 200 tons per year). The nation's finance ministry has made it quite clear that the Chinese want to control the global gold market, wrenching it out of the hands of the New York Comex Stock Exchange and London Metal Futures Exchange. With so little gold passing through the hands of Comex and LMFE traders since 2014, it appears that this represents more than just a vainglorious boast by China. With the proper volume of trades on the Shanghai metals exchange, the nation could very easily become the global leader in gold production, consumption, and exchange. That would provide the yuan with a much needed major boost as the economy cool and the Chinese stock market collapses. There's ample belief among economists that the slump of the Chinese market benefits gold more than any other commodity, since the losses of Chinese investors (totaling about a quarter of a trillion dollars in just the last three months) can be avoided with precious metals as a substitute for the yuan. China has to walk a careful tightrope with their currency, however, since China holds more US currency in reserve than any other nation, making a yuan surge at the expense of a dollar slump into a zero-sum proposition. For that reason, they've turned to gold rather than boosting their own currency, though we still cannot definitively answer the question of how much gold lies in Chinese hands.
Investing In Gold, China-Style
The two biggest movers and shakers for gold in 2015 will be the Fed's decision to raise interest rates come autumn and the IMF's inclusion of the yuan come October. For the yuan to enter into IMF circulation, China needs to keep the currency stable and productive. To do that, in turn, they need gold -- a lot of gold. While India took home the prize for gold consumption in 2014, China will almost certainly top the charts in 2015, snapping up huge quantities of bullion in order to bring their total reserve count higher and higher than the new data indicates. That's welcome news for gold investors, who could use a source of demand from anywhere and anyone in order to jump-start the flagging market. Investors can wait a few months before turning to gold, since it's likely the metal will drop slightly more before it begins a long turnaround, but by autumn gold should be on the menu for any portfolio looking to ride the upward momentum of gold thanks to two big currency decisions by the Federal Reserve and the IMF.