Where is China hiding all of its gold?
China claims it owns 1,658 tonnes of gold. But the real figure could be much higher. Dominic Frisby looks at how much gold China has, and why it matters.
How much gold does China have?
The question won't go away, because the answer is vital.
The answer could define, in no uncertain terms, how important or irrelevant gold is in the modern world.
Is gold obsolete, or does it still have a significant role to play?
Today we consider that question, and look once again at China's gold
Gold useless shiny pet rock or the very essence of money?
Some people argue that gold is just an inert, useless metal, good for little more than jewellery. Its role in finance is as obsolete as the horse is in transport, or the telegraph in communication. The world has moved on. As Ben Bernanke famously said, it is just a tradition'.
At the other extreme are those who argue that gold is essential. It is nature's money, it is honest money, it is sound money. The serial abuses perpetrated by commercial banks, central banks and governments mean the resumption of its historical role is inevitable. It is just a matter of time.
I get both arguments, but it's the price of gold, I suppose, that tells us which argument is winning.
When gold was over $1,800 an ounce and rising, with the first Greek crisis, quantitative easing everywhere and a global financial crisis barely two years behind us, the gold-is-money' arguments looked strong.
Now gold is at $1,100 and falling, stock markets are strong, economies have recovered and the Greek crisis is well, still there the gold-is-history' argument has the upper hand.
So what China this enormous, emerging superpower thinks and does becomes immensely important to the argument.
Some argue that the fact China has turned itself into the world's largest gold producer, as well as vying with India to be the world's largest importer, is telling. It shows that China understands' gold, that it thinks gold is important, perhaps even that gold is money. Some go on to argue that China doesn't like fiat dollars or euros, and that it wants the yuan to be the global reserve currency, backed, at least in part, by gold.
Others say there are a simply lot of Chinese people and many of them like jewellery. Any official purchases are nothing more than a gentle balancing of the books.
If China came out and announced 8,000 tonnes of official gold holdings enough to rival those of the US the statement would be both aggressive and breathtaking. This new and mighty nation, an economic and military rival to the United States of America, now has a hoard to match that in Fort Knox. China clearly sees that gold is a strategic monetary asset!
But it didn't. The announcement, when it came a few weeks back, that it holds a disappointing 1,658 tonnes was, if anything, designed to rock the boat as little as possible.
It is a significant advance on the 1,054 tonnes announced in 2009. But it is not enough to make anyone realistically think it has designs for a new gold-backed reserve currency.
In fact, given that over 10,000 tonnes have either been produced in or imported to China over the same period, a 604-tonne rise in official reserves is a major disappointment. In fact, it's such a disappointment that many people are now saying the real number is higher.
So how much gold does China have? And where did the other 9,500 tonnes go?
Where is all of China's gold hiding?
Bron Suchecki of the Perth Mint has done his homework on this subject here. Bron's background and his tendency towards understatement in a gold world full of hyperbole mean his judgment on this is as sound as anyone's.
He makes the point that China has encouraged private accumulation. Studying gold flows, he argues that China is aiming for private citizens to accumulate 55% of flow with the remaining 45% going to commercial banks and the central bank (the People's Bank of China PBOC).
His conclusion is that China has understated its official gold but not by as much as many people were hoping. He arrives at the overall figure of 2,400 tonnes.
Commercial banks are holding another 2,060 tonnes, while there are 6,490 tonnes in the hands of private buyers for a grand total of 10,950 tonnes in China.
Source: Perth Mint
This tallies with analyst Koos Jansen's findings, although Jansen argues there are closer to 14,000 tonnes of gold in China (private and official). This figure is based around what happened to privately-owned jewellery after the revolution whether it stayed private or was taken by the government and sold to import other goods. This is a disputed subject, which we won't go into here.
To put those numbers in some kind of visual context, imagine a cube with each side measuring just over a foot (32cm). Each face of the cube would be a bit larger than a 12-inch record sleeve. That's how big a tonne of gold is.
The United States, the richest country in the world, has 8,133 of the cubes (making up 74% of its foreign exchange reserves). It's quite amazing that so much wealth can be compressed into such a small size. Germany has 3,383. Here in the UK we have just 310 of these boxes. Oops. China produces more than that every year.
It's estimated that the total amount of gold mined throughout all of history, most of which still exists, amounts to about 170,000 tonnes, or just over.
Maybe China is simply looking for insurance too
So all in all, that 2,400-tonne China figure, if we can accept it, is frustrating. It doesn't resolve the argument that is the premise for today's Money Morning. It suggests that China is less ambivalent about gold than the rest of the world it clearly likes it but it doesn't make a clear statement about gold's role in the modern world (at least as the Chinese see it), nor about Chinese gold-backed-reserve-currency ambition or a plan to collapse the dollar.
If it does have such an ambition and I have to say I find the idea unlikely, for various reasons there are no immediate plans to implement it. We could be waiting rather a long time for that one.
You could, however, make the argument that Chinese commercial banks and official gold should be counted together, given that most commercial banks there are state-owned. In which case, you have a rather more sit-up-and-take-notice figure of 4,500 tonnes or thereabouts.
You could also note the total amount of gold held in China. Suchecki estimates around 11,000 tonnes, Jansen closer to 14,000. Nick Laird of Sharelynx has the figure closer to 15,000. Meanwhile, Laird estimates total US holdings (private and public) at 26,000-27,000 tonnes. At its current rate of accumulation, it won't be long before China matches the US.
But perhaps what is most interesting is the enormous volume of gold that has been bought privately some 6,500 tonnes and that China has encouraged its citizens to do this.
Perhaps it is as unsure about fiat currency as the rest of us. It wants its citizens to own gold just in case.