How much gold does the Peoples Bank of China really own?

(August 27, 2015 - by Iain Stewart)

It is widely known as a safe haven, but gold bullion is a relatively small market with the above ground value of gold estimated at around $7trn.

If you compare that to the bond and equity market capitalizations of around $140trn and $70trn respectively, it is a very small market. However, gold has become incredibly financial asset.

Gold derivatives are now thought to represent some 90 times the tradable inventory, making paper trading of gold a dominate force in its price determination in comparison to physical demands.

Central banks, their inventories and demands also play a vital role in the price of the precious metal. However, at times the numbers involved in their intricate gold dealings can be called into question.

For example, the People’s Bank of China (PBoC) recently announced it is holding 1,600 tonnes of the precious metals, yet strangely it would appear by these figures approximately 60% of this was accumulated in June 2015 alone, with just 600 tonnes amassed in the preceding six years.

At the same time though, other statistics from the country show that China has produced more than 2,000 tonnes and imported more than 3,000 since 2009. 

Many of the polemics surrounding gold involve a comparison with equities. If you are pro-gold, many believe you are anti-stocks, anti-innovation and anti-prosperity.

Gold, in our view, is no way comparable with a risk asset which has a claim on the future cashflows from commerce; neither should gold be grouped with commodities consumed to create economic activity. 

In an environment of increasing paper currency devaluation, debasement and volatility, it can make sense to denominate a portion of one’s portfolio in a monetary asset outside the current credit driven financial system as a means of diversification.

It is worth remembering that, although gold is no longer used to back currencies, nation states continue to hold gold as part of their reserves as long-term financial insurance – it does not seem unreasonable for savers to do the same. 

Iain Stewart is an investment leader in Newton’s real return team