Gold divides opinion almost as much as Brexit. For some, gold is an antiquated asset, as irrelevant to modern global finance as the horse now is to transport. Central banks only own gold out of "tradition, long-term tradition", as Ben Bernanke, former chairman of the US Federal Reserve, famously declared in Congress back in 2011. But, for others, gold is money. The oldest, purest and soundest money there is. And he who owns the gold makes the rules, as the old saying goes.
Gold makes up 77% of US foreign exchange reserves, rather a high allocation for a mere tradition. Official records show it owns some 8,133 tonnes, most of it held in Fort Knox, making it the world's largest owner. And the US, pretty much, does make the rules. It has the world's most powerful military and its largest economy.
But there is a mighty new kid on the block in the form of China. Its economy, some argue, is already as big as America's if GDP is assessed in terms of purchasing power parity. Its army is bigger; maybe not yet as powerful, but that day cannot be so far away.
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And then there's China's gold. I think it has considerably more than it says it does. We know that over the past decade China has been both importing extraordinary amounts as well as mining it. When you crunch some numbers, as I'm about to here, you realise that its gold holdings could be the most important subject in global finance and yet the least talked about. Just how much gold does China actually have? And what are the implications?
The world's top gold producer...
Let's begin with some context. Total central bank gold reserves stand at around 34,500 tonnes, which is roughly 18% of the 190,000 tonnes of total above-ground supply. China's officially stated number is 1,948 tonnes 3% of its foreign exchange reserves. This amounts to the sixth-biggest national hoard in the world and is barely a quarter of US reserves.
Now let's try to calculate what it really has. We'll start with China's production: what it has mined. South Africa had for over 100 years been the world's largest gold producer, but in 2007 it was overtaken by China, which produced 276 tonnes that year.
China has remained the world's largest producer ever since. Its production reached 464 tonnes in 2016. Last year's output of 404 tonnes was still 30% higher than that of the world's second-largest producer, Australia. Over the last decade, China has produced around 15% of all the gold mined in the world.
But here's the thing: China keeps the gold it mines. Exporting domestic mine production is not allowed. Since 2000 China has mined 6,057 tonnes. Not all of the gold it mines will end up in government hands, of course, but already that 1,948 figure looks doubtful. Indeed more than 50% of Chinese gold production is state-owned. China National Gold Group Corporation alone accounts for 20%. Even though production has risen quickly, Chinese reserves are dwindling and so Chinese mining companies are acquiring assets abroad.
State-owned Shandong Gold has expanded into Argentina, Kyrgyzstan, Congo-Brazzaville and Ecuador as well as investing in listed mining companies in Australia and Canada. Zijin Mining Group has operations in Tajikistan, Kyrgyzstan, Australia, New Guinea and the Democratic Republic of Congo. Its international production exceeded domestic by 16 tonnes last year.
... and its biggest gold importer
As well as being the world's largest producer, China has also become the world's top gold importer. In 2014 it overtook India to become number one. It imports its gold from Hong Kong, Switzerland, London, Australia and Singapore.
It is hard to get precise figures, but Hong Kongdoes provide numbers, and we know that another 6,000 tonnes has entered the country via Hong Kong since 2000, most of it this decade. So we are now at 12,000 tonnes.
Most of the gold that enters China is sold via the Shanghai Gold Exchange (SGE), whether imported, mined or recycled. So the SGE can, loosely, act as something of a proxy for demand. And it is possible to get numbers for SGE withdrawals.
Since 2008 an astonishing 18,500 tonnes have been withdrawn from the SGE. To give you an idea of Chinese gold demand relative to the rest of the world, in 2018 3,260 tonnes of gold were produced worldwide, and some 2,055 tonnes were withdrawn from the SGE. At least 20,000 tonnes have made their way to China one way or another this century.
The hidden hoards
We also have to factor in to our thinking the gold that was in China, whether as bullion or jewellery, prior to 2000. The World Gold Council estimates a figure of 2,500 tonnes in privately held jewellery. Add in domestic mining and official reserves and you have around 4,000 tonnes. (What happened to privately-owned jewellery after the revolution? Did it remain private or was it confiscated by the government and sold to import other goods? A bit of both is likely.)
By the time you cobble together pre-2000 gold official reserves, mining and imports, you're left with a figure somewhere between 20,000 and 25,000 tonnes. I've consulted four different expert gold analysts in different locations around the world Ross Norman, Bron Suchecki, Koos Jansen and Nick Laird and they all concur with this estimate.
However, both Jansen and Norman point out that there is still gold entering China that is not accounted for by SGE withdrawals. Often the People's Bank of China (PBOC), the central bank, will not buy gold from the SGE but elsewhere. The PBOC likes to buy 12.5kg bars, which do not trade on the SGE. It will often use dollars, while the SGE sells its gold in yuan. The SGE has actually stated that only consumers buy gold over its exchange.
The PBOC may also not like to disclose all its gold purchases, which on the SGE it would have to do. It prefers "monetary gold", which does not require disclosure on customs reports, and therefore opts for exchanges such as London, Dubai and Switzerland, where less disclosure is required.
Indeed, it is believed that the PBOC was on the other side of the trade when Gordon Brown sold
400 tonnes of UK bullion at the bottom of the market at the turn of the century. What's more, Norman points out that not all China's state-owned gold is held by the PBOC. "There are other state agencies which buy gold: the State Administration of Foreign Exchange, China Investment Corporation [the sovereign wealth fund] and the military, which doesn't have to declare its purchases."
All in all, we are looking at a figure above 25,000 tonnes. The big question now is: how much of that gold is in state hands and how much is privately owned? China has encouraged private accumulation of gold. "50:50," Norman estimates. Suchecki, formerly of the Perth Mint, who studies gold flows, reckons that private citizens are accumulating more like 55% of flow. But whether we're talking about 40% or 50% of 25,000 tonnes, state-owned gold in China is considerably higher than the declared 1,948.
Matching America's reserves
But 20,000-25,000 tonnes in China is not far off what is in the US. Nick Laird argues that total US gold holdings official and private are also somewhere between 20,000 and 25,000 tonnes. Norman feels it's lower. It was illegal for US citizens to own anything more than a small amount gold until 1974, and so much got exported in the cash-for-gold trade that was heavily pushed in the 2000s. That scrap made its way to China too, he says.
Why would China understate its reserves? "They don't want to embarrass America," says Norman. "They're not ready for that yet. "So much gold has been making its way to China without being declared," says Norman. "It really wouldn't surprise me to see official Chinese gold holdings at 10,000, even 12,000 tonnes." 10,000 tonnes would equate to 11% of foreign exchange holdings. That's about the international average. In those terms, 10,000 tonnes is not such an extraordinary number.
But there is no way China could declare such large official holdings. It would cause too much disruption. In the foreign-exchange markets a yuan backed by gold could strengthen significantly as it gained credibility from the yellow metal, and China doesn't want that just yet; it prefers the yuan low to keep exports cheap. What's more, if the yuan surged the government's $3trn-plus of US dollar foreign exchange reserves would be dramatically devalued in yuan terms, which it also almost certainly doesn't want. And gold itself would be catapulted higher which China wouldn't want while it is still accumulating.
But, perhaps most of all, to declare that it had so much gold would be a direct challenge to American supremacy, almost a declaration of war. China's not ready for that either. Not yet, anyway. The word from the London Bullion Market Association (LBMA) gold conference in Shenzhen last month is that China is developing its own gold-backed, yuan stablecoin. A stablecoin is a cryptocurrency tied to an established currency to reduce volatility; in this case the currency will be gold.
I still struggle to believe that an authoritarian regime like China would want to cede control of its currency to gold, but if China really does have designs on the US dollar's reserve currency status, gold is the way to do it. It's not as though it won't have enough. If ever there were a symbol of wealth shifting from west to east, it is this incredible amount of gold making its way to China. It almost certainly already has more gold than the US. How long before it makes the rules?
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
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