An official of the Chinese State Administration of Foreign Exchange (SAFE) announced Friday, 24 April that the Chinese government is increasing its official monetary gold reserves, reflecting purchases the SAFE has made over the past six years.
Hu Xiaolian, director of the SAFE, said that it had purchased around 14.6 million ounces of gold between 2003 and now. This gold has been held in an account at SAFE, but now has been transferred to the monetary reserves of the People's Bank of China.
The PBOC has listed its monetary reserves of gold at 19.3 million ounces since 2002, when it had added metal from former trading stocks to its monetary reserves, after it ended its role as national market maker in gold and silver.
The PBOC's monetary gold reserves thus have increased from 19.3 million ounces to 33.89 million ounces, putting it ahead of the National Bank of Switzerland in rankings of central banks with gold monetary reserves. China's central bank now has the sixth largest gold holdings among monetary institutions, behind the United States, Germany, the International Monetary Fund, France, and Italy.
Gold prices responded modestly to the news. Gold rose to $913 in spot trading on Friday morning. The price response was muted by the realization that the news was that the Chinese government had bought relatively modest volumes of gold over the past six years, compared to what some gold bulls had expected China to buy, without being seen as an active buyer in the market.
The way in which the gold was purchased and then transferred to the PBOC is important. It has been clear that Chinese government leaders were interested in buying gold over the past several years, but that there was a great deal of internal discussion as to whether such gold should be added to monetary reserves held by the central bank, or as investment stocks to be held by China Investment Corporation or other non-monetary Chinese government entities.
The real news today is that that discussion has been resolved, and the gold has been added to the monetary reserves held by the central bank.
This is important because it indicates the extent to which gold is being rehabilitated as a monetary reserve asset, not only by the Chinese monetary authorities but by central bankers around the world. It has been clear that gold was being restored as a more important part of the world's financial system, with rising investment demand over the past nine years. The Chinese government's decision to say that this gold belongs in its monetary reserves emphasizes that monetary authorities also are looking at gold with greater interest than they have since the 1960s.
On an immediate basis, the gold market was right to not push prices higher on the news. The purchases have been made over six years. They were made from domestic Chinese refineries. They were moderate in size compared to both China's overall monetary reserves and to the gold market.
Longer term, however, this is the most concrete sign yet that central banks are viewing gold as more important as a monetary asset. CPM Group has written extensively for many years that central banks would sharply reduce their net gold sales around the last part of this decade. They have. We had also said we did not think central banks would return as net buyers of gold, as they were prior to 1965. We began to modify that view with our Gold Yearbook this year, saying that it was clear from our discussions with numerous central banks that more of them were becoming more interested in possibly adding gold to their monetary reserves.
Between 2003 and 2008 investors are estimated to have bought 260.0 million ounces of gold. It now turns out that 14.6 million ounces, or 5.6%, of this has been transferred to monetary reserves. That has only a minor connotation for the overall gold market.
One last point should be noted. Other central banks are having the same thoughts.
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