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China currently produces 340 tonnes of gold
annually. This may increase
by up to 100 tonnes a year or more. It imported 210 tonnes in 2010. The demand for gold is
increasing in China and this is likely to continue in line with the growth of
the Chinese Middle classes.
We do not know for sure how much the People’s Bank of China took
into its reserves and are only likely to know in two years time. Russia produces around 250 tonnes of gold per annum. It increases its reserves by 152.4 tonnes by January 1st 2011.
These two nations present different requirements from the local and
international gold markets, but does it make a difference where the gold is
bought?
Local Production and additions to national reserves
China
China’s central
bank, the People’s Bank of China, does not disclose the annual amount
it purchases for its reserves, but uses an agency to make these purchases for
it. Every five years, this
agency delivers the gold bought to the bank, which then announces its
increase. The last time it
did this was three years ago and it reported an increase of 454 tonnes, averaging out to 91 tonnes
a year.
If this amount had been
bought from local production, it would equate to the amount of local
production over those five years.
As the People’s Bank of China does not want to disclose how much
gold is bought locally and how much, if any, is bought in the international
market, we will never be sure.
Russia
Russia produces in the
order of 250 tonnes [2010 approximation up from
184.49 tonnes in 2009 – 38% increase]
locally. Russian central bank
purchases have been rising steadily [25% per annum] over the last two years,
but not as fast as local production. There is scope for the
central bank to increase the volume of local purchases and keep it at 50+% of
local production.
Vladimir Putin,
Russia’s Prime Minister [but the power behind the throne] had
previously stated that Russia would be buying on the international
market. One of the Deputy
Chairmen of the Russian central bank said the bank had bought its added
reserves from local production. Is one right and the other not, or are both right?
What dictates where the gold is purchased?
The London Gold Market
–International physical gold market
90% of the world’s
physical gold sales in the international market take place in London through
the five bullion banks that make up the gold Fixing. The two Daily Fixes account for
the vast majority of these deals, taking place at 10.30 a.m. and 3.00 p.m.
London time. Each of the
bullion banks has their own clients and does their best to hide their
identity from outsiders.
But experienced dealers can sense the presence of a central bank in
the market.
One of the ways they can
tell is by the way the banks deal in gold for them. A central bank does not want to
chase prices, so will buy gold offered to it, rather than make a large offer,
which may well drive prices up.
A Chinese central bank official made the comment some time ago that it
is difficult for a central bank to buy gold in the international
market. But a central bank
will do it if the amount purchased or sold is not sufficient to affect
prices. If it is a large
amount, then sales or purchases will be spread out over time so as not to
affect prices unduly. This may hide the presence of a central bank.
The moment it gets out
that a central bank is in the international market prices will rise or fall
more than is usual. This
is the deterrent to China in particular, which is very concerned with its
privacy.
Advantages and
Disadvantages of buying internationally or locally
Newly
mined gold production is above 2,400 tonnes per
annum. The international
gold market is the place to source large amounts of gold.
- Any amounts needed above
locally produced volumes must come from this market or direct from refiners
such as the Rand refinery in South Africa.
- Purchasing gold outside a nation requires foreign
currency from foreign exchange reserves and not the local currency. With a tonne
of gold around $45 million apiece, using local currency can be inflationary
[it requires the injection of that currency into the local economy].
- Where
a dealer is able to guard its client’s identity and purchase large
volumes of gold, central banks will do better to use the London gold market,
even if it has local production, for it does not have to wait for the local
gold to be available.
- Buying locally produced gold involves a local producer and the central
bank with a price set for each transaction only by reference to international
prices no matter how large the volume of gold involved.
- There is little to no immediate impact on international prices as the
international market does not ‘see’ the transaction. The only way local deals impact
international prices is through the absence of that local supply from the
international market.
- Local production is a certain source of supply. When supply is tight in the
international market buyers will have to raise prices to bring out additional
supplies. Even when
international markets have a tight supply situation local production remains
on tap to a central bank.
- In the case of China where local supply is
insufficient to supply the retail & institutional market as well as the
central bank, central banks can ensure that they manage their purchases well
when they buy locally and leave the retail & institutional buyers to get
the balance of their purchases from the international markets via imported
gold.
As you can see it generally pays a central bank to buy local production
if it is there. It is
easier, private and more manageable in terms of prices. China in particular appreciates
the control it retains over the disclosure of purchases.
Julian D. W. Phillips
Gold/Silver
Forecaster – Global Watch
GoldForecaster.com
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