China's hidden gold purchase policy

Evidence suggests that China is continuing to buy gold for its reserves, but is doing so in a manner designed not to over-disrupt the global gold market.

Author: Lawrence Williams
Posted: Monday , 07 Sep 2009

LONDON -

There seems to be little doubt that China continues to buy gold for its reserves, but surreptitiously, as it has no desire to move the markets unduly, and it knows full well that any announcement of a big gold purchase will likely do just that.

It is not exactly a secret that Chinese government economists and bankers are disturbed about the U.S. Quantitative Easing moves. They feel that this has ultimately to lead to significant inflation and a corresponding big decline in the value of the dollar within the next few years and with some $2 trillion in reserves this is not something they are keen to precipitate by announcements of a major gold purchase programme - or even by showing the world that its gold reserves are increasing.

In an interesting article in the U.K's Daily Telegraph, International Business Editor Ambrose Evans-Pritchard comments on views expressed by Cheng Siwei who he describes as being "until recently Vice-Chairman of the Communist Party's Standing Committee, and now a sort of economic ambassador for China around the world" and thus in a good position to understand the country's policies vis-a-vis gold purchases and the dollar.

The gist of the comments was that China has fundamentally lost confidence in the dollar and is looking towards a more significant proportion of gold in its reserves.

But this is easier said than done without causing huge disruption in the gold market itself and Cheng is quoted thus: "Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as to not stimulate the market".

This looks as though it means not only is China buying on dips in the gold price - and there is evidence of strong support from somewhere every time gold falls to a certain level - but is also concealing its purchases by not moving the gold into official reserves, but the holding of it by some other government entity so it stays off the official books. When China relatively recently announced its big jump in gold reserves it was apparent the purchases had actually taken place over about five years and were only moved into the official reserves this year, and thus only then reported to the IMF. Thus it is likely that purchases are continuing in the same manner - off the open books.

If all this is correct it does mean that there is little in the way of downside risk for gold holders with potentially massive support coming in at about $930, but perhaps a cessation of this major support buying at around current gold price levels which could keep gold range-bound. But, of course, if and when China announces its next significant rise in its gold reserves this could have a substantial impact. But on past performance such an announcement may not happen for a few years - when it may suit China to do so.