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And We’re Back…
In the past two weeks we have highlighted the importance of Russia and the
world’s central banks to the bullish gold price narrative.
In our recent article “From Russia with Gold”, we detailed that
Russia has the 2nd largest unmined gold reserves in the world. Its gold
production since 2008 has risen dramatically and remains on the rise.
And the Russian central bank has been steadily increasing its official
gold reserves since the 1st quarter of 2007, in the lead-up to the Global
Financial Crisis (GFC).
In addition, last week our esteemed managing editor and chief analyst
penned an excellent essay entitled “Hiding in the Gold Demand Shadows”, which
demonstrated the fact that central bankers worldwide (i.e. in emerging and
developed countries) fully recognize the importance of gold.
Certain emerging market central banks, in particular the BRIC nations,
have been net buyers of gold since the GFC. In addition to the BRIC’s, Turkey
is also on track for a record year of gold imports at an estimated 270
tonnes.
However, it’s the speculation about the accumulation of central bank gold
reserves by the “C” in BRIC that attracts my focus this week and therefore we
are back to talking about China.
It’s All about Planning & Execution Baby!
If there is something China does a lot of, it’s planning. This week,
they’re at it again.
Since China’s economic rebirth in 1978, which marked the beginning of their
“Reform and Opening Up” policy, they have demonstrated a strong
tendency to carry out their stated strategies. Aptly, when they now
announce their plans, the world tends to listen. At least it ought to.
The financial press was abuzz this week with the announcement that “China’s
ruling party pledged to let markets play a decisive role
in allocating resources.” This, the abbreviated summary of the results
of China’s most recent 10-year planning session, is different from previous
policy statements where China is on record stating, “markets will play a basic
role in allocating resources.”
The change in wording from “basic” to “decisive” was no
doubt intended to send a clear message to all observers, domestic and
foreign, that China fully intends to continue on the path of “Reform and
Opening Up” by liberalizing and globalizing its economy, which includes
the structural reforms needed to fulfill the pledge.
China’s Central Committee of the Communist Party elects a new President
and Premier every 10 years. The current president and premier, Xi
Jinping and Li Keqiang, were newly elected in November 2012 and ever since,
the world has been anxious to learn of their intentions for the next 10-year
stretch.
The 10-year plans are supplemented by 5-year plans, which we’ve spoken of
many times in connection with China’s commitment to developing its gold
market. In our article, “China
to Rebuild Great Wall with Gold!” we composed a brief
history describing how China has included the advancement of its gold market
as a key component of its planning and economic ascendance.
One of the most significant changes to China’s gold policy occurred in
1993 when they allowed the market to set the price of gold instead of the
state. But this was just the beginning. In 2000, China explicitly
announced its intention to establish an open gold market as part of its 10th
five-year plan.
In keeping with their tendency to deliver on its plans, China has
exponentially increased their domestic gold production to an expected record
of 430 tonnes this year, making them the world leader by more than 60%.
They have also invested heavily in developing gold markets abroad while
aggressively promoting and facilitating easier ways for citizens to buy,
sell, and store gold.
One substantial pillar of China’s gold infrastructure that enables their
gold hungry citizens to access the physical metal is the Shanghai Gold
Exchange (SGE), which was established in 2002. To put in perspective how much
physical gold is delivered via the SGE in comparison to world mining
production, we present the following chart.
Note that in 2013, the amount of physical gold transiting the SGE is now
approaching total world mined production of the yellow metal. This is
as bullish as it gets.
Another aspect of China’s gold infrastructure is the Shanghai Futures
Exchange (SHFE) which satisfies domestic hedging demand. Since the exchange
introduced its first futures contract in 2008 it has become a dominant force
in the gold futures market.
Even though the SHFE gold contract is only available to domestic market
participants so far, the contract is the 4th most traded and the 2nd largest
gold futures market in the world. This has taken place in the span of
only five years.
There are other recent newsworthy examples that demonstrate China is
executing their planned gold market strategy.
The 2,000 tonne gold vault that opened this week in Shanghai and the
October purchase of the former JP Morgan headquarters in New York by Fosun
International, which just so happens to house the largest commercial gold
vault in the world, would be two such examples.
In summary, China’s net gold imports year-to-date from Hong Kong (their
primary conduit) have been truly staggering at 856 tonnes. And,
although many gold commentators seem hesitant to crown China as the world’s
new leader in this category, we aren’t, they are!
They dominate global gold production and imports and are rapidly
developing their domestic market infrastructure to accommodate gargantuan domestic
and international gold trade.
PBOC is topping off the Tank before Big Announcement
Despite the substantial amount of gold China imports to serve local
demand, what is coming to light this week is the significant amount of gold
the People’s Bank of China (PBOC) has potentially accumulated.
According to Philip Klapwijk, CEO of Precious Metal Insights, the PBOC,
China’s central bank, may have amassed 300 tonnes of gold in the first half
of 2013 alone.
Klapwijk comes to his conclusion by way of anecdotal evidence, which he
says must be used because the Chinese are opaque, at best, about their
official gold holdings.
His analysis points to a discrepancy between the amount of physical gold
being supplied to the domestic market from mining (none of which is exported)
and imports (primarily from Hong Kong) and the amount of actual investment
and jewelry demand in the country.
In simple terms, the amount of supply exceeds the amount of public demand
by a significant amount, and thus the surplus gold in his analysis is being
bought by the PBOC.
A Bloomberg analyst, Andrew Cosgrove, arrived at a similar conclusion. He
projected that the total growth of PBOC gold reserves for 2013 could reach
620 tonnes.
The last time that the PBOC announced the amount of its official gold
reserves was in April 2009. At that time it stated that their holdings
had increased from 600 tonnes (announced in 2003) to 1,054 tonnes.
Essentially, China had doubled its official gold reserves in 6 years
without letting on.
One straightforward reason as to why they do not report their gold buying
activities is because they do not want to tip their hat and cause the price
to rise dramatically. The PBOC also has to be careful about creating
too much volatility in currency markets.
However, China has a pattern in recent times of announcing their gold
holdings every 5 to 6 years and thus the date for the anticipated next
announcement is fast approaching.
According to James Rickards, author of the superb book Currency Wars, in
April of 2014 China will shock the world and announce that they have
accumulated 5,000 tonnes of gold. This would give them the 2nd largest
official gold reserve in the world, second only to the U.S. with a reported
8,133 tonnes.
They are accumulating gold as a foreign exchange asset as one aspect of a
broader plan to elevate their currency in international stature commensurate
with the size and importance of their economy, the 2nd largest in the world,
again second only to the U.S.
China has over $1.7 trillion of U.S. dollar denominated assets, the
largest of any nation by far, and therefore has been critical of profligate
U.S. monetary policy.
Their criticism, however, has fallen on deaf ears. This week Janet Yellen,
likely to replace Ben Bernanke as Fed Chairman early next year, spoke in
support of continuing the Federal Reserves’ unprecedented monetary stimulus
program indefinitely.
Yellen’s dovish posture offers little comfort to the Chinese and
underscores China’s efforts to diversify away from the dollar as quickly and
yet as stealthily as possible.
In summary, it is reasonable to assume that the PBOC is accumulating gold
in significant volume annually, and 2013 has likely been a banner year
indeed.
We know that the Chinese tend to follow through on their plans and they
have made it clear that gold is considered a strategic monetary asset. If
history is any indicator, China will soon announce an updated figure for
their gold holdings, and if their production and import statistics are any
gauge, then it is likely, as Jim Rickards says, their next announcement will
shock the world.
We’ll leave you with the following visual just to give you an idea of what
these numbers could potentially look like as China makes good on its
strategic gold accumulation plans.
Closing Thoughts
The Tocqueville Gold Fund is one of the top performing gold funds.
Its highly respected portfolio manager, John Hathaway, is bullish on
the gold price due to the extreme monetary policies being pursued in the
West, led by the U.S.
Although he includes both gold and gold miner’s stocks in his fund, he
prefers gold mining stocks to gold because they typically offer 1.5 to 2
times leverage to the gold price.
We share his views. As such, we present our Gold Miners Comparative
Analysis Table, which has a multitude of critical metrics to use in
evaluating and comparing gold mining companies.
In the pages of our newsletter we educate our subscribers on what to look
for when discerning between the different gold miners and guide them towards
those that suit their individual appetites for risk.
(Click the image to enlarge)
>
That’s it for this week. Thanks for reading!
Regards,
RJ Wilcox
Jeremy@goldminersreport.com
www.goldminersreport.com
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