China has quietly almost doubled its gold reserves to become the world’s fifth-biggest holder of the precious metal, it emerged on Friday, in a move that signals the revival of bullion after years of fading importance.
Gold rose to a three-week high of more than $910 an ounce after Hu Xiaolian, head of the secretive State Administration of Foreign Exchange, which manages the country’s $1,954bn in foreign exchange reserves, revealed China had 1,054 tonnes of gold, up from 600 tonnes in 2003.
The news could spark interest in gold among other central banks. “When the largest holder of foreign exchange reserves discloses an increase in gold holdings, other countries may decide to think more carefully about underweight gold positions,” said John Reade, a precious metals strategist at UBS.
The increase in China’s gold reserves has come primarily from domestic production and refining. However, the news raises questions about the future of Beijing’s foreign reserves policy.
Ahead of the G20 summit in London this month, China suggested global reliance on the US dollar as a reserve currency should be reduced.
China has been diversifying away from the dollar since 2005, when it broke the renminbi’s peg to the US currency and officially marked it to a basket of currencies, but it still holds more than two-thirds in US dollar-denominated assets by most estimates.
As its trade surplus and forex reserves ballooned in recent years, Beijing continued to buy huge amounts of US Treasury bonds while raising the proportion of purchases it allotted to other currencies and to gold.
China’s accumulation of gold has taken place as European central banks have gradually cut back back gold sales following a 1999 agreement to prevent the market from being flooded after prices were dragged sharply lower after the UK decided to sell part of its reserves.
“China’s announcement signals a broader shift in central banks’ attitude towards gold,” said Philip Klapwijk, chairman of GFMS, the precious metal consultancy.
Suki Cooper, a gold analyst at Barclays Capital, said China’s move was “reigniting gold’s relevance as a monetary asset”.
European central banks agreed to limit gold sales to 500 tons a year in 1999, under the Central Bank Gold Agreement after a UK decision to sell part of its gold reserves dragged prices sharply lower.
Since 1999, central banks in Europe have sold large amounts of gold, investing the proceeds into bonds. But in the past two years they have curtailed their sales significantly while central banks outside Europe became net buyers of bullion.
China’s forex reserves grew from $623bn at the start of 2005 to $1,906bn at the end of September last year but in the last six months the spectacular growth has slowed to a virtual stop, with reserves rising by just $7.7bn (€5.8bn, £5.2bn) in the first quarter.
That means smaller new purchases of everything from US Treasuries to gold.
Paul Atherley, Beijing-based managing director of Leyshon Resources, said that even after the latest purchases China had a very small percentage of its reserves in gold, far below the US or other developed countries.
“Those [gold] holdings are still too low in terms of the size of its economy and the growing significance of its currency,” he said.
The announcement boosted gold prices to a three week high above $910 an ounce as investors bet other countries could follow.
Russia has being an active buyer, following Beijing’s similar pattern of purchases from local miners. China became last year the world’s largest producer of gold, outranking South Africa.
Since the financial crisis started, investors have piled record amounts of money into gold, boosting prices to above $1,000 an ounce. Gold hit a low of $250 an ounce a decade ago, when central banks started selling the metal.
Additional reporting by Chris Flood
24 Apr 2009 7:06pm
By Jamil Anderlini in Beijing and Javier Blas in London
Source: The Financial Times