China almost certainly owns more gold than the United States – here’s why it’s important
China almost certainly owns more gold than the United States – here’s why it’s important

China almost certainly owns more gold than the United States – here’s why it’s important

If you thought the West was unprepared inflation – or indeed for Russia – wait and see how unprepared it is for this bomb.

This is the biggest story in the world of finance, and yet no one except your fearless blogger reports on it.

For those without attention span to read all the way to the end, let’s go to the leg and get the main point out in advance: China has more gold than the United States.

Why China might want to own a lot more gold than it admits

We have seen many examples over the last few decades of how the United States is arming the dollar and leveraging its status as a global reserve currency.

The sanctions regarding Russia and its removal from the Swift messaging system this week is perhaps the most dramatic example of all. Russian civilians have had their wealth decimated (in fact probably significantly more than decimated for most) almost from one day to the next.

China will certainly look at all this, learn from Russia’s mistakes and think it needs to de-dollarize as quickly and discreetly as possible. Whether it is to protect the wealth of its citizens or its national interests, China cannot depend on a banking system governed by the West – particularly the United States – which is one of its weapons of war.

Both Russia and China have known that they need to be de-dollarized for a long time, which is why both have increased their gold holdings so steadily.

Let’s start with Russia’s gold. The chart is lent by Nick Laird from goldchartsrus.com, and it shows the Russian central bank’s accumulation to today’s figures of, give or take, 2,300 tons – about 74 million ounces (there are 32,150 troy ounces in a ton).

According to official figures, this makes it at least the fifth largest gold owner in the world.

The table below, courtesy of the World Gold Council, shows the 19 best owners of gold, including their foreign exchange reserves and their percentage allocation to gold. The United States has the most – 8,134 tonnes – followed by Germany, Italy, France and Russia.

Britain sits proudly in 17th place. Behind Kazakhstan, Turkey and Uzbekistan. Thanks Gordon Brown.

Country

Currency reserves $ m

Total reserves $ m

Gold holdings%

Gold reserves Oz (m)

Gold reserves (tonnes)

1

USA

239,485

695,225

65.55

455,741

8,133.5

2

Germany

99,513

287,732

65.41

188,219

3,359.1

3

Italy

83,583

220,966

62.17

137,383

2,451.8

4

France

102,439

238,954

57.13

136,515

2,436.4

5

Russian

485,462

614,255

20.97

128,793

2,298.5

6

China

3,264,064

3,373,233

3.24

109,169

1,948.3

7

Switzerland

1,019,165

1,077,439

5.41

58,274

1,040.0

8

Japan

1,358,141

1,405,543

3.37

47,402

845.9

9

India

598,057

639,736

6.52

41,679

743.8

10

Netherlands

28,229

62,547 th most common

54.87

34,318

612.4

11

Taiwan

544,899

568,636

4.17

23.7367

423.6

12

Kazakhstan

13,407

35,664

62.41

22,257

397.2

13

Turkey

81,176

103,186

21.33

22,010

392.8

14

Uzbekistan

13,070

34,558

62.18

21,489

383.5

15

Portugal

11,606

33,042

64.88

21,436 th most common

382.6

16

Saudi Arabia

465,059

483,161

3.75

18.102

323.07

17

United Kingdom

175,879

193,265

9

17,386

310.3

18

Lebanon

19,430

35,501

45.27

16,072

286.8

19

Spain

75,479

91,256

17.29

15,778

281.6

The country we focus on today is the one in sixth place on the table, China.

Here is why China’s gold reserves must be far greater than official data suggest

First, consider China’s US dollar stock – over three trillion of them. That is more than Britain’s annual GDP. Its U.S. dollar holdings obscure any other nation; China does not want them to go to zero – at least not yet.

Then consider its gold holdings. It has 1,948 tonnes, almost 3% of its foreign exchange reserves. The US gold reserves account for over 65% of its reserves.

What if China approaches that level?

Well, my argument is that China has a lot more gold than it says it does.

There are two parts to this argument. First, China’s gold mining. In 2007, China overtook South Africa as the world’s largest gold producer. It has been ever since. In the last decade, it has produced about 15% of all gold mined in the world.

Since 2000, China has extracted about 6,830 tons. More than half of China’s gold production is state-owned – China National Gold Group Corporation alone accounts for 20%. And China keeps the gold it extracts – exports of domestic mine production are not allowed.

I say that number again: 6,830 tons. Already the official 1,948 figure looks very questionable.

With declining domestic reserves, Chinese mining companies have also bought assets abroad, across Africa, South America and Asia. International production exceeds domestic production – by around 15 tonnes by 2020.

Secondly, there is the fact that in addition to being the largest producer, China is the world’s largest importer. Gold imports via Switzerland and Dubai are not always declared, but we know that over 6,700 tonnes have entered the country via Hong Kong alone since 2000.

Add that to the cumulative gold production since 2000 and you get a figure of over 13,500 tons.

Whether imported, extracted or recycled, most of the gold that enters China passes through the Shanghai Gold Exchange (SGE), including the gold imported from Hong Kong. So SGE withdrawals – for which we have figures – can serve as something of an approximation to demand. And it is possible to get figures for SGE withdrawals: Since 2008, almost 22,000 tonnes have been withdrawn from SGE.

China's gold reserves

Then we need to add gold stored in China, whether as gold bars or jewelry, before 2000. The World Gold Council estimates a figure of 2,500 tonnes in privately owned jewelry. Added to domestic mining and official reserves, you get a figure of about 4,000 tons.

Connect it all – cumulative production, imports and existing stock – and you reach a figure not far from 31,000 tonnes.

Chinese gold production

I’ve talked to some of the world’s top analysts – Ross Norman, Bron Suchecki and Koos Jansen – and they all arrive at similar estimates. Alasdair McLeod of Goldmoney thinks it’s even higher.

So why should China keep its gold reserves quiet?

But there is more, as Ross Norman points out.

Not all gold entering China stands for SGE withdrawals. The People’s Bank of China (PBOC), the central bank, is happy to buy 12.5 kg of rods that are not traded on SGE. PBOC often spends dollars on stock exchanges in London, Dubai and Switzerland, while SGE sells its gold in yuan.

The Chinese army also owns gold and does not have to declare its purchases. And there are other government agencies: the State Administration of Foreign Exchange and the China Investment Corporation – the sovereign wealth fund, for example.

How much of this gold is state-owned? Norman guesses 50%; Suchecki, formerly of Perth Mint, says 55%.

At 50%, the implication is that China owns over 15,000 tons – close to double that of the United States.

“The Chinese central bank’s gold reserves have apparently been completely unchanged since mid-2019 at 1,948 tonnes,” says Ross Norman. “But few of us believe in it. Put an extra zero on the end (19,480 tons) and I should not be surprised if it is not much closer to their official holdings”.

Alasdair McLeod goes a step further. “China probably has as much as 30,000 tons stored in various accounts, but not declared as official reserves.”

Whether it is ten, 15 or 30,000 tons, there is no way China can declare such large holdings. Not yet at least – it would cause an unwanted increase in both the yuan and the gold price. The government’s $ 3.2 billion in US dollar foreign exchange reserves would be devalued.

“I do not think China needs to brag about its greatness,” Norman says. “A stronger currency as a result of that reserve aid would, after all, be counterproductive as it would give rise to competitive disadvantages”.

What’s more, declaring so much gold would be a direct challenge to US supremacy, which China is probably not yet ready for. Parity first, then supremacy.

For now, they follow Deng Xiaoping’s doctrine of “we must not shine too brightly.” Its declared 1,948 tons is perhaps the absolute minimum it could declare and look credible. But only 3% of China’s foreign exchange reserves in gold? Drag the other.

If China decides to arm money, as the United States has done, all it has to do is declare its gold reserves, perhaps even partially repay the yuan with them. The speech was at one point his central bank digital currency (CBDC) would be partially gold-backed.

Unsupported Western money risks losing a large portion of their purchasing power in such an event. To support Western fiat even partially with gold would mean a dramatic upward adjustment of gold – to tens of thousands.

But that’s the card China now has with its 20 years of relentless accumulation. Whoever owns the gold makes the rules.

Dominic’s film, Adam Smith: Father of the Fringe, about the unlikely influence of the father of the economy on the largest art festival in the world is now available to watch on YouTube.


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