China Upping The Ante In Gold Reserves

(June 11, 2019 - Lawrie William)

Since last December China has again been publishing its supposed monthly gold accumulations into its forex reserves after a couple of years of reporting an unlikely zero increase.  We have long speculated that China has been building its gold reserves up even when it is reporting no increases by holding gold in accounts it doesn’t feel the need to report to the IMF.  It has a long track record of doing this and only reporting the rises when it moves this gold into its forex accounts.  We suspect it has all the time been building its gold reserves at at least the kind of levels it has reported for May and the size of its gold reserve it reports to the IMF is understated – probably substantially.  Or to use the current buzz words is ‘fake news’.

In the event, the Chinese Central Bank has reported an increase of 15.86 tonnes in its gold reserves in May. This is very much the kind of level by which Russia has been building its gold reserves monthly; we will have to wait another 9 days or so before we learn Russia’s May gold reserve increase is announced, but we anticipate something of around the same size as the Chinese figure. This suggests that Russia and China together will be adding around a total of some 400 tonnes to their ‘official’ gold reserves – perhaps more - this year alone which will, with other regular central bank buyers of gold, mean that the high levels of national gold buying into reserves of last year (651.5 tonnes according to the World Gold Council) will be maintained this year, or perhaps even exceeded.

This central bank gold buying was seen as a key element in gold’s 4% price increase in 2018 and a similar price increase this year would put the year-end gold price at around $1,350 – a level that has already been reached on occasion this year.  We are anticipating, however, an even higher year-end level of around $1,400 or higher given a number of other geo-economic and geo-political developments which we see as gold positive.

It is probably worth looking at gold vs equities this year as to which is likely to provide the best investment growth.  Given there is a real danger of an equities collapse, and any growth is likely to be muted, gold looks to be the better option from a safety point of view. The gold price looks unlikely to collapse, particularly since the U.S. dollar is showing signs of weakness.  Silver too could be worth a speculative gamble.  With the gold:silver ratio (the amount of silver needed to buy an ounce of gold) at over 90 – the highest level for over 25 years – silver looks to be underpriced at the moment and if the gold price should show good signs of strength then the ratio could come back sharply giving the silver price a substantial percentage gain advantage over gold.  But so saying silver has always been a more volatile investment than gold both on the upside and the downside.