Saturday, April 25, 2009

China Has Begun Building Gold Reserves

While I believe gold jumped Friday on this news regarding China building its reserves, the more important question to ask is over the longer run in terms of "why" and "implications for the dollar some far off day in the future". I'm not going to ask those questions because the solution to everything is print more fiat currency and someone will buy them, and if not someone, we will buy them ourselves... but for those who care about "the very long term" (I've given up) it is something for you to think about.

It appears the last time China disclosed this information was 2003 when they were up to 600 tonnes, so this move to 1,054 is large in magnitude but spread over 6 years since the last update - hence not quite so exciting as first glance would have it appear. Considering how large their reserves have grown the past half decade, this should not be all that surprising - the gold is still only 1.5% of their foreign exchange reserves. I'd be very curious (a) how much of that buying has been done in the past 6-12 months and (b) why they decided to conveniently release this information now ... the last question is rhetorical.

This moves China to the 5th spot among nations, with France and Italy at over double at 2,400 tons. IMF (which has been selling) and Germany are at 3,200 to 3,400 and the US still has 8,100 despite selling off a lot over the years.

With all that said, it was very strange to see gold moving up together with equities - they have been an inverse relationship for quite a while. So we'll see in the coming weeks if the gold strength is a foreshadow of things to come or simply a knee jerk reaction to the China disclosure.

Via Bloomberg
  • China boosted its gold reserves by 76 percent since 2003 and has the world’s fifth-biggest holding by country, said Hu Xiaolian, head of the State Administration of Foreign Exchange.
  • The nation increased its reserves by 454 tons to 1,054 tons through domestic purchases and refining scrap metal, Hu said in an interview with the Xinhua News Agency today. The amount is more than Switzerland’s 1,040 tons, World Gold Council data show, and is worth $31 billion at current prices. ($31 billion aka one Citigroup bailout)
  • China has the world’s largest foreign exchange reserves at $1.95 trillion as of March 31, according to state administration data. The holdings have climbed about sixfold in the past six years as the country had record trade surpluses and inflows of foreign investment
  • China, the world’s biggest gold producer, has increased its holdings before, Hu said in the interview carried on the administration Web Site. They rose from 394 tons to 500 tons in 2001 and to 600 tons in 2003, it said.
  • “This shows a change in attitude in Asian central banks,” said Si Kannan, associate vice president at Mumbai-based Kotak Commodity Services Ltd. “While the IMF is selling gold, Asian central banks are diversifying into gold. That’s a good thing, in times of dollar uncertainty and the global volatility in the forex market,” he said by phone from Mumbai today.
  • By purchasing from domestic producers, China demonstrated that it has the ability to acquire substantial amounts of gold in a way that is difficult for the international market to track and therefore not disruptive to prices.
Speaking of gold - the ETF could have just formed one gorgeous "double bottom" in April. A move through the trendline using the highs of February and March 09 would be muy interesting.

Long Powershares DB Gold Double Long ETN (DGP) in fund; no personal position

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