miércoles, 29 de julio de 2015

miércoles, julio 29, 2015

Has China Manipulated The Gold Market?

by: Peter Arendas            
             

 

Summary
  • The recent steep decline of GLD price was supported by Chinese announcement that it holds only 1,658 tonnes of gold in its official reserves.
  • Gold declined below $1,100/toz, and GLD declined below $105/share.
  • It is questionable how reliable the information about Chinese official gold reserves really is.
  • There is a lot of gold in China that can be relatively easily used to boost the official gold reserves.
  • The current prices are an opportunity for long-term investors.
Gold prices have declined below $1,100 and the share price of SPDR Gold Trust ETF
(NYSEARCA:GLD) has declined below $105. GLD made two unsuccessful attempts to break the $110 level over the past 9 months. The third one was successful. The main catalyst that helped it price to break the important support level was China's announcement that the country holds 1,658 tonnes of gold.


 

What is the problema?

The problem is that although China announced that its official gold reserves increased by 604 tonnes, or approximately by 60%, compared to the last public data released back in 2009, it is significantly less than expected. For example, Bloomberg Intelligence expected that the People's Bank of China holds gold reserves of 3,510 tonnes, and the World Gold chief economist at Australia & New Zealand Banking Group Ltd. predicted that China holds official gold reserves of at least 3,000 tonnes.

Most of the analysts expected that the country hoards gold in order to back its currency. But that would take huge amounts of gold - gold that would be closed somewhere in the vaults of the People's Bank of China, which means that it wouldn't be present on the global gold market for sale. The supply would be tighter, which would support gold prices. The Chinese know this, they know the estimates of Bloomberg Intelligence and other banks and analysts, and they know that if they announce that the volume of their official gold reserves is significantly lower than expected, market participants will be shocked and the price of gold will decline. This may be the reason why they suddenly (after 6 years of silence) announced their official gold reserve figures.

The timing was perfect. The gold price closed near an important support level at $1050 on Friday. During the weekend, China announced that it holds only 1,658 tonnes of gold, and the price of the metal declined below the $1,100 level (equivalent to GLD in the $105 area). The major support level has been broken, and some analysts predict that gold will decline below $1,000, which would mean that GLD will decline below $100 per share.

Why would China manipulate gold prices? The answer is easy. To buy more gold at lower prices. If the country wants to increase the share of gold on its foreign exchange reserves to a level comparable to that of the Western countries, it will need to add thousands and thousands of tonnes. The current amount of 1,658 tonnes gold equals to 1.6% of total Chinese foreign exchange reserves (table below). To grow it to the Indian level of 6%, China needs to add 4,560 tonnes gold. To increase it to the Russian level of 13.4%, China needs to add 12,228 tonnes gold.

And to get to the ECB level, the country needs to increase its current official gold reserves by 25,803 tonnes. Just for comparison, the World Gold Council estimates that there were 183,600 tonnes of gold in existence above ground. The 2014 global gold production was only 2,860 tonnes. If China really wants to increase the share of gold on its foreign exchange reserves substantially, it needs to acquire huge amounts of gold at as low prices as possible.


(Source: World Gold Council)

Is the number presented by the People's Bank of China reliable?

Yes, it is. Maybe. Although the timing of the announcement is suspicious, the amount of reserves announced is surprisingly low, and it is in China's interest to suppress gold prices so that they can keep on buying cheap ounces, the number presented by the People's Bank of China may be technically correct. It is only statistics, and statistics can be manipulated easily.

China is the largest gold producer in the world. All of the gold it produces stays in the country.

Moreover, it keeps importing huge amounts of the metal. The chart below shows that the country's volume of net gold imports was growing at a rapid pace over the last couple of years.

It is estimated that China mined and imported approximately 6,400 tonnes of gold between 2000 and 2013. Assuming that the 2014 numbers were comparable to the 2013 ones, the cumulative total is approximately 8,000 tonnes of gold.

(click to enlarge)

The above mentioned data show that there is a lot of gold in China. Although the official gold reserves are said to be only 1,658 tonnes, thousands of tonnes are held by the Chinese people.

And huge amounts may be held by Chinese banks and large companies. The Chinese government and the regional governments may hold gold as well. This means that huge amounts of gold may be held by the Chinese government, although they are not a part of the official reserves. Of course, they could become a part of the official reserves easily, if needed.

Also, the gold holdings of common people could easily be nationalized. USA is a country that tends to picture itself as the world's democracy number one. And it is a country that had prohibited its citizens from holding investment gold for a significant part of the 20th century. If a democratic country that declares that it protects freedom and ownership rights could nationalize the gold holdings of its citizens, a country like China, i.e. a communist dictatorship applying market economy, will have no problem in doing the same.

In other words, yes, the official gold reserves held by the People's Bank of China may be only 1,658 tonnes right now. But the bank, in cooperation with the Chinese government is quite probably able to increase this amount substantially within a couple of minutes, hours or days by simply reallocating the gold held by Chinese institutions and individuals.

Conclusión

The recent decline of GLD share price was supported by the fear that China isn't interested in buying gold as much as was originally thought. But the quite opposite may be true. There are some serious doubts that USA doesn't hold as large gold reserves as they claim to. And there are some serious doubts that China doesn't hold as small gold reserves as it claims to. I believe that the recent gold sell-off was fabricated to suppress gold prices, in order to acquire further cheap ounces. Although gold and GLD may decline further, the current low prices are a welcomed buying opportunity for long-term investors. Gold is a cyclical commodity, and the price of gold is currently too low. Some estimates say that one in 10 gold mines is operating at a loss right now. Taking into account all-in sustaining costs, the number should be significantly higher. This can't last forever.

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