How Much Gold Does the People’s Bank of China Have?

One of the most fascinating developments in the gold market since the turn of the century is China’s burgeoning role as a leader in the sector. The Chinese have been buying gold and the Chinese have been producing gold in record numbers now, whereas 15 years ago, they played a much smaller role in the global gold market.

As investors we want to have accurate data regarding China’s gold: how much is produced, imported, exported, and held. Unfortunately the People’s Bank of China is presumably not very forthcoming when it comes to reporting its gold holdings, and this makes the global fundamental picture of gold somewhat opaque. Nevertheless I think that there is enough information available to investors so that they can estimate approximately how much gold the PBoC has.

As this article plays out, the significance of this will become apparent to investors.

The PBoC updates its official gold holdings sporadically. Officially the PBoC holds about 1,050 tonnes of gold.  However, this figure was last updated in 2008. Prior to that the figure was 600 tonnes, and it had been 600 tonnes for several years, from 2003-2007.

Now it is highly unlikely that the PBoC, which has more than doubled its official gold holdings this century, bought gold only in the years in which it announced increases (2008, 2003, and 2000). What is likely happening is that the  PBoC is accumulating gold regularly and not reporting it.

The Chinese banking and political elite know that if they announce their gold holdings that this could potentially drive the price higher, and presuming that they are still accumulating, this would be bad given that they wouldn’t be able to accumulate as much gold at a higher price as they would be able to at a lower price.

Thus, while there is no official report stating that the PBoC’s gold holdings exceed 1,050 tonnes, this is by far the most likely scenario. Considering that China is the top producer of gold in the world (400 tonnes in 2012), and considering that China has been importing an incredible amount of gold (over 2,000 tonnes and more than 1,000 tonnes net of exports), it is plausible that the PBoC has not just increased its gold holdings but has increased its gold holdings substantially over the past five years.

We don’t know exactly how much gold the PBoC has accumulated, but we do have data pertaining to the amount of gold produced in China and the amount of gold entering China.

As of 2008, when the PBoC last updated its gold holdings, net gold in China was about 4,000 tonnes, or about four times greater than the PBoC’s official holdings. Since then, the amount of gold in China has more than doubled if we consider the country’s net import data. With this being the case it is well within the realm of possibility that the PBoC has doubled its gold holdings to 2,100 tonnes.

But it could also be significantly more than this.  The China Gold Association estimates that the PBoC holds more than 2,500 tonnes, which would mean that China’s gold holdings are exceeded only by the U. S. (8,100 tonnes), Germany (3,400 tonnes), and the International Monetary Fund (2,800 tonnes). There is further evidence of this, considering that the PBoC recently bought a 2,000 tonne capacity gold vault.

While there is nothing official there is a lot of very convincing circumstantial evidence that the PBoC has substantially more gold than its official statements indicate. This means that it has been accumulating gold at a fairly rapid pace.

This is very significant for the future price of gold and China’s role on the geopolitical stage. The PBoC isn’t buying gold as a trade. That is, it isn’t buying gold at $1,300 to sell it a couple of years later at $1,700. The PBoC is buying gold for the long run. While it doesn’t have official reasons for wanting to hold so much gold, the reasons are fairly intuitive and straightforward.

If the PBoC holds gold then there will be more global confidence in the Chinese renminbi. Despite the recent correction in the exchange rate between the renminbi and the dollar, the fact remains that the Chinese are expanding the role of the renminbi in global trade, and they are doing so to gain economic and political influence.

By holding gold, the PBoC instills confidence in the renminbi so that China’s global trading partners will be more willing to accept it and so that global investors will be more confident in holding renminbi-denominated assets.  Thus, by accumulating gold the Chinese are increasing their influence and power on the global economic and political stages. Not only should gold traders take notice given the impact that the PBoC has on the supply and demand of gold, but those with political interests need to realize that by buying gold the PBoC is buying geopolitical influence.

Ultimately investors should be confident that the PBoC will more likely than not put a floor underneath the gold market. This is extremely bullish. Furthermore, there is a distinct possibility that the Chinese will update their gold holdings, and when they do, they will make what I have just said about China’s growing economic and political role a reality.

Disclosure: Ben Kramer-Miller owns gold coins and shares in select gold miners.

More From Wall St. Cheat Sheet: