Friday, April 24, 2009

China's gold reserves growing, and fast... What does it mean?

China's gold reserves have nearly doubled over the past five years, according to the country's foreign exchange administration.

At the moment China holds about 1000 tons of gold, up from 600 tons in 2003 according to Hu Xiaolian who is head of the State Administration of Foreign Exchange (SAFE). Take note, the last time China released such information was in 2003, so this is not exactly a every day occurrence.

Definitely big news, especially for the United States which at the moment is the major beneficiary of China's massive foreign exchange reserves, most of which are held in U.S Dollar denominated assets.

“China still has only a very small percentage of its forex reserves held in gold, much less than the United States or other developed countries,” said Paul Atherley, Beijing-based managing director of Leyshon Resources. “Those holdings are still too low in terms of the size of its economy and the growing significance of its currency.”

At the moment, China's total gold reserves only account for roughly 1.6% of its entire accumulated FOREX reserves. The total value of its gold holdings are currently reported as $31 billion (211.6 billion yuan).

Furthermore, according to this FT article the move coincidentally comes as many European central banks are selling their gold and as the International Monetary Funds discusses selling a considerable portion of its own gold reserves.

“This is probably the most significant central bank announcement since the Central Bank of Russia announced at the LBMA gold conference in Johannesburg in 2005 that it wanted to hold 10 per cent of its foreign exchange reserves in gold,” said John Reade of UBS.

Check out this chart of how gold has performed over the past five years.

Gold has traditionally been viewed as a store of value and a safe heaven for wealth in volatile times, and these are indeed volatile times.

China recently hinted that it would like in a perfect world that the global economy adopt a single currency. The Political Satire, the Daily Show articulately described in last nights episode, this is just not going to happen (Note the link provided takes you to a video from last nights episode that contains some questionable language).

In reality it is hard to believe China legitimately thinks the United States would consider adopting a single currency. What China was really aiming to do was send a message that the United States better make sure that it not only pays back all the money China has lent it over the years but that it also pays it back at a premium.

If inflation goes through the roof because of low interest rates and the massive amounts of money the United States is printing, China is going to be paid back in a very devalued currency, and this will make for a very unhappy China.

Recent headlines relating to China's planned gold purchases sends yet another clear message to the United States.

"Make sure you get your house in order!"

China's FOREX reserves have grown from $623 billion at the start of 2005 to a whoppin' $1.906 trillion at the end of September of 2008. Growth however did slow tremendously in the first quarter of 2009, growing a mere $7.7 billion.

With its current stock of 1000 tons of gold, China has the fifth largest holdings of gold in the world. Hou Huimin, vice general secretary of the China Gold Association suggested in his opinion China should build it reserves to 5,000 tons.

One thing is clear, China is going to be very careful where its stores it wealth in the coming years.