In July I did a post on How much gold does China really have? which looked at the rate China was accumulating gold reserves based on their occasional announcements of how much gold they had. Extrapolating out their average monthly rate of 8 tonnes gave the chart below, which projected to 2,186 tonnes by the end of 2020.
Since then China has begun to report its gold reserves every month and has accumulated 86 tonnes in five months – an average of 17.2 tonnes. That is a lot more than their previous rate and you can get a better idea of the acceleration if I update the chart above with the new reserves figures and then project that rate into the future.
If China keeps at this rate then it will have 2,792 tonnes by the end of 2020, which is 606 more tonnes than I initially estimated. In my previous post I noted that official reserve additions plus commercial bank additions seemed to average 45% of monthly flow of gold into the Chinese market (that is, imports and newly mined domestic gold). The chart below shows these two estimates in green and blue.
What is interesting is that the average of the green and blue over the May 2009 to June 2015 (the two dates where reserves were announced) comes out at 17.1 tonnes a month (the red dotted line) which is very close to the average Chinese accumulation rate of 17.2 tonnes (the purple dotted line) since July 2015. The average of the June 2011 to June 2015, a period where inflows into China increased significantly, is 20.5 tonnes, which is close to the two largest monthly additions to China’s reserves.
These figures would seem to imply that now that China is reporting its reserves it can accumulate officially at the rate it was doing so unofficially in the past. Of course that theory implies that Chinese commercial banks would no longer be adding to their gold inventories, which seems unlikely as long as the gold market in China is developing and expanding. On the other hand, as financing trades unwind possibly the commercial banks are reducing inventories and this is being absorbed into official reserves.
I would also note that the above analysis assumes China adds to its reserves by sourcing from the domestic market only. Koos Jansen is of the view that China is acquiring 400oz bars from overseas markets. I do not discount that this may occur but my view is that even if done via the Bank Of China as Koos speculates (and I think that is the most likely candidate) such buying would be obvious to the Western bullion banks. If PBOC via BOC gold buying was consistent and ongoing I think it would make them prey to traders and hence my view would be that any such activity would be sporadic and tactical, taking advantage of times when western gold market demand was weak. As we receive more data over the next year on China’s reserves, commercial bank stock, imports and mining we should be able to confirm which theory is correct.