Features

It’s only a matter of time before China has the biggest gold pile in the world

Whoever has the most gold, makes the rules, says Dominic Frisby. For the moment, that's the US – but don't count on things staying that way.

17-2-16-china-1200

"Whoever has the gold makes the rules" runs the old saying.

So, where's the gold?

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Who's producing? Who's buying? Who's selling?

In today's Money Morning we look at international gold flows with a particular focus on China.

Advertisement
Advertisement - Article continues below

The US government has the biggest gold pile but for how long?

Data-superman Nick Laird projects that if you add private and institutional holdings to that number, there are 26,00027,000 tonnes in the US. That would be about 15% of all the gold that has ever been mined.

The US is top dog. It has the gold. And, internationally, it makes the rules.

But for how much longer? There are changes afoot.

China is now the world's largest gold producer. It has held this title since 2007 when it overtook South Africa and it shows no sign of handing back the mantle.

Chinese gold production amounted to around 453 tonnes in 2016, according to the China Gold Association. The next largest producer, Australia, is some way off about 180 tonnes lower. We don't have the exact numbers yet for 2016, but it is likely to be close to the 273 tonnes it produced in 2015.

In third place we have Russia (250 tonnes), followed by the US (216 tonnes) and Peru (176 tonnes). South Africa has slid to a lowly seventh place.

Advertisement
Advertisement - Article continues below

In other words, about 15% of total global production is Chinese. And here's the thing of all that gold it produces, China barely exports an ounce. It keeps all of it. Not only that, but China is the world's biggest importer. This title used to belong to India, but China became the leader in 2014.

Importing gold was something China began in earnest in 2011 around about the time that gold peaked at $1,920 an ounce. The longer the bear market has gone on, the more China has bought. I'm not sure if that makes them canny buyers or the opposite, but something is going on and, when you consider the cumulative effects, it is something big.

China's huge gold hoard is only getting bigger

Koos Jansen

In 2011 China imported most of its gold via Hong Kong, which does provide the figures. Imports came in at just below 400 tonnes considerably more than the entire reserves of the UK (310 tonnes).

In 2012, China started importing from Switzerland too. In 2013, imports reached 1,400 tonnes. In 2014, China added the UK to the list of countries it imports from and in 2015, Australia. 2015 was a record year for imports not far off 1,600 tonnes, roughly equivalent to Russia's entire reserves.

And so to 2016. Jansen collates the export numbers from Hong Kong, Switzerland, the UK and Australia to arrive at the figure of 1,300 tonnes, down slightly on the previous year, but still 30% higher than total Swiss reserves.

Advertisement
Advertisement - Article continues below

In total, since 2011, China has imported more than 5,000 tonnes. That's more than is in the vaults of the International Monetary Fund (IMF), and more even than Germany's holdings (around 3,400 tonnes). Another three years at a similar rate, and China will have imported more gold than there is at Fort Knox.

The cumulative impact is astonishing. Add China's domestic production into the equation, as well as the recycling of scrap, and it seems that since 2009, more than 12,000 ounces of gold have either been produced in, or imported to, China.

It's pretty easy to start drawing the conclusion that China is planning to return the world to some kind of international gold standard and thereby undermine US imperial and economic might by destabilising the dollar.

China isn't going to return us to the gold standard yet

China has encouraged private accumulation of gold, so much of the gold is falling into domestic hands. Again, just how much is difficult to quantify. Bron Suchecki of the Perth Mint, studying gold flows, argues that China aims for private citizens to accumulate 55% of flow with the remaining 45% going to commercial banks and the Chinese central bank (the PBOC).

The latest statement from the PBOC is that it holds 1,842 tonnes. Given the amount of gold that has made its way to China, that 1,842 tonne number does seem suspiciously low or at least towards the lower end of what is credible.

And it is likely that the Chinese would understate this number, first so as not to push the price up when they are still in accumulation mode; secondly, so as not to throw down any "we're as powerful as you" gauntlets at the US.

Advertisement
Advertisement - Article continues below

But that is pure speculation on my part. Jansen tells me that his sources think the number is probably double the official number.

He has put together this chart, which estimates not all the tea, but all the gold in China.

17-2-17-MM-1

But that growth in reserves since 2009 is quite something. At this rate China will soon be making all the rules.

It's worth noting by the way that while US holdings amount to more than 70% of its foreign exchange reserves, China's official gold holdings amount to just 2%. China could double or triple the amount of gold it owns, and it would still only amount to 4% or 6%. Even the UK's paltry hoard amounts to 8.5%.

China needs more gold, and it seems to be trying to acquire it as discreetly as possible.

There are several takeaways from all this.

Advertisement
Advertisement - Article continues below

First, all of the gold that has made its way to China over the last few years stays there. It doesn't come back. If ever there was a symbol of the transfer of wealth and power from east to west this is it.

Chinese gold imports may be down ever so slightly on 2014, but it is still an accumulator of physical metal by far and away the world's biggest.

If ever there is a Western buying spree, and China continues to hoard what it has, the lack of supply is going to push the price higher more quickly than in previous bull markets. We got a taste of this in the first six months of last year.

If China becomes a net seller, look out below. But I don't think there's too much danger of that.

Advertisement

Recommended

Visit/investments/commodities/600639/commodities-look-cheap
Commodities

Commodities look cheap

Gold may be on a bull run, but industrial commodities, including copper, zinc and aluminium, remain cheap.
17 Jan 2020
Visit/investments/commodities/gold/600623/how-and-where-to-buy-gold-coins-and-bars
Gold

How and where to buy gold coins and bars

We have compiled a directory of leading gold brokers where you can buy gold bullion, coins and bars online, over the phone or even in branch. New t…
14 Jan 2020
Visit/520466/gold-dont-panic-and-dont-sell
Gold

Don’t panic about Iran – but don’t sell your gold either

Markets have reacted calmly to the tension between the US and Iran. But don’t get too complacent. It’s still a good idea to hold on to some gold as in…
9 Jan 2020
Visit/520221/heres-how-gold-could-rise-above-7000-an-ounce
Commodities

Here’s how gold could rise above $7,000 an ounce

That the gold price could hit $7,000 an ounce is a logical and plausible possibility, says Charlie Morris. Here, he explains how it could get there.
30 Dec 2019

Most Popular

Visit/investments/commodities/gold/600686/gold-and-silver-bull-market-2020
Gold

Want to make money in 2020? Gold and silver are looking like a good bet

If you want to make money from investing, says Dominic Frisby, it’s simple: find a bull market and go long. And in 2020 gold and silver are in a bull …
22 Jan 2020
Visit/economy/600667/money-minute-wednesday-22-january-uk-public-borrowing
Economy

Money Minute Wednesday 22 January: UK public borrowing

Today's Money Minute looks ahead to the latest on of the UK's public finances, with the Office for Budget Responsibility’s forecasts for borrowing thi…
22 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600653/indias-small-and-mid-cap-stocks-are-set-for-big
Share tips

India’s small and mid-cap stocks are set for big gains – here are three to buy now

Each week, a professional investor tells us where he’d put his money. This week: David Cornell of the India Capital Growth Fund highlights three favou…
20 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600636/class-acts-going-cheap-buy-into-europes-best
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020