I wanted to talk to you today about what could be the biggest story in global finance. Depending
on your point of view of course.
But that story is China’s gold.
How much gold does China really have.
Now Gold divides opinion - almost as much as Brexit. And the importance of this story
kind of depends on your view of gold.
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, said 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, (although some
point out that that gold has not been audited in over 50 years), 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 the US’s, certainly if looked at in terms of purchasing power
parity. Its army is bigger - maybe not yet be as powerful, but that day cannot be so
far away.
And then there’s China’s gold. I’m of the view that 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 that its gold holdings are as rivalrous to the US, as its economy and military.
Let’s begin with some context. Here, courtesy of the World Gold Council, is a table showing
the world’s largest gold owners.
Rank Country/Organization
Gold holdings (in metric tons)
Gold's share of forex reserves
1 United States
8,133.5 76.9%
2 Germany
3,366.8 73.0%
— International Monetary Fund
2,814.0 N/A
3 Italy
2,451.8 68.4%
4 France
2,436.0 62.9%
5 Russia
2,241.9 20.2%
6 China
1,948.3 2.9%
7 Switzerland
1,040.0 6.0%
8 Japan
765.2 2.8%
9 India
618.2 6.9%
10 Netherlands
612.5 69.7%
— European Central Bank
504.8 32.4%
11 Republic of China
423.6 4.1%
12 Portugal
382.5 70.4%
13 Kazakhstan
377.5 62.6%
14 Uzbekistan
332.2 56.7%
15 Saudi Arabia
323.1 3.0%
16 United Kingdom
310.3 9.3%
17 Lebanon
286.8 25.7%
18 Spain
281.6 18.1%
19 Austria
280.0 53.9%
20 Poland
228.6 9.0%
Total central bank gold reserves stand at around 34,500 tonnes, which is roughly 18%
of the 190,000-or-so tonnes of total above ground supply.
China’s officially stated number is 1,948 tonnes - 3% of its foreign exchange reserves.
Not even a
quarter of what
the US has.
Now let’s try and 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 grew and grew, reaching 464 tonnes
in 2016. Last year production
was lower, at 404 tonnes, but still a good 30% higher than 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. (China does export gold - it exported one of its pandas to me! - but not
its domestic production. In any case its exports are minimal, less than 5% of its imports.
In August for example, while it imported 80 tonnes, it exported just one. In September
it exported 1.8).
In total since 2000 China has mined some 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%.
Despite ramping up production, Chinese reserves are dwindling and so are Chinese mining companies
acquiring assets abroad.
State-owned Shandong Gold has expanded into Argentina, Kyrgyzstan, Congo-Brazzaville,
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.
As well as being the world’s largest producer, China has also become the world’s largest
gold importer. It began ramping up its imports in 2010, and 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 as many of these trades are over the counter (OTC), but Hong Kong
does 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.
Even if we cannot get precise figures for OTC trades, 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. I can tell you that 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, let me
tell you that in 2019 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 the other this century.
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
a figure of around 4,000 tonnes.
(What happened to privately-owned jewellery after the revolution? Did 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 and 25,000 tonnes.
I’ve consulted four different gold analysts in different locations around the world - Ross
Norman, Bron Suchezki, Koos Jansen, Ross Norman 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) will not
buy gold from the SGE, but elsewhere.
The PBOC likes to buy 12.5kg bars, which do not trade on the SGE. The PBOC will often
use dollars when the SGE sells its gold in yuan. (The SGE has actually stated that only
consumers buy gold over its exchange – although in practice that doesn’t seem to be the
case).
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 thus will it prefer OTC exchanges, especially in 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
was sold that infamous 400 tonnes of UK bullion at the turn of the century.
What’s more, Ross Norman makes the point to me that not all China’s state owned gold
is held by the PBOC. “There are other state agencies which buy gold - the State Agency
for 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. Bron Suchecki, formerly of the Perth Mint, who studies gold
flows, reckons private citizens are accumulating more like 55% of flow. But whether it’s
40 or 50% of 25,000 tonnes, state owned gold in China is considerably higher than the declared
1,948.
But 20-25,000 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 and 25,000
tonnes. Norman feels its lower. It was illegal for US citizens to own 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. My guess is that they give the figures they
give to be credible - they needed credibility to get included in the IMF’s SDRs - but
without issuing any challenge to the US.”
“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 forex markets a yuan backed by gold could strengthen significantly, which China
doesn’t want just yet. (It wants the yuan low for trade purposes).
Its $3trn+ of US dollar foreign exchange reserves would be dramatically devalued, which it also
almost certainly doesn’t want.
And gold price 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. Not
yet, anyway.
The word from the LBMA gold conference in Shenzhen last month is that China is developing
its own gold-backed, yuan stablecoin.
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 like it won’t have enough.
If ever there were a symbol of the wealth of the world shifting from west to east, surely
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?
Thanks very much for watching ladies and gents.
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