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91 Tonnes of Gold [per annum] on the [Great] Wall...

By Jon Nadler       Printer Friendly Version Bookmark and Share
Apr 24 2009 4:25PM

Good Afternoon,

Looks like we picked the wrong day to go travel. Thankfully, there is always an airport waiting lounge to step in and function as an ad-hoc office.

First, the news. No, it's not that gold is up $8.80 per ounce. Although, considering the gravitas that certain forums have already exhibited with regard the story you are about to read, that figure should be more like $88 per ounce. Today's news (to the ultra-bullish bugs) was at least as earth-moving as that of the US buying back its own debt - you know, it came out on March 18, and gold rallied....$70.

Anyway, gold was last seen around $912.50 per ounce - still a very nice finish to the week that proved to be the first rising one in prices in a month. Silver, well, it rose too. Seven pennies to be exact. To $12.89 an ounce. Platinum fell to $1174. Palladium. Yawn. No change. Chrysler Ch11 papers at the printers. FIAT still saying " Niente soldi!" (no money, honey).

No, there is little else on the radar in the market news section today, other than China.

According to a Reuters news report issued this morning, China revealed (the actual word that was used was 'admitted') that is has purchased 454 tonnes of gold over the past five years, for its reserves allocation. Radical Extremists Gold Bugs have already been and will continue to be jumping all over this news  item with a plethora of “I Told You So!? and “This is IT!? cheers, trying to put a spin on something that – at the end of the day - is no more than a very orderly, unsurprising, and logical unfolding of China’s extant reserve allocation policies.

As a matter of fact, the 454 tonnes taken from the marketplace (quite ‘elegantly’ we might add) did no manage to live up to the allocation parameters that China had imposed upon itself way before 2003 rolled around. "Gold prices jumped on the news of Chinese buying and were up more than 1% on the day at US$912.05 an ounce at 0715 GMT. By a Reuters calculation, China's holding of gold would be worth around US$30.9-billion at current prices. That accounts for only about 1.6% of China's total foreign exchange holdings and is little more than one-tenth of the value of the U.S. gold reserve, the world's biggest. It also means gold has slipped as a share of China's total reserves from about 2%, based on end-2003 prices."

There is no denying that -as central bank purchases go over the past five years- this is the 'big gorilla' of buys. However, please keep the purposes of such an accumulation in perspective, as well as the causes of same. If the revelations are indicative of anything, they are not of a country that suddenly finds itself completely smitten with gold and utterly disgusted with the US dollar, but of one that has seen its foreign exchange reserves explode at supernova rates over the period in question. A subsequent Reuters news report framed the gold offtake by China in its proper context. It should (at least) temper the bullhorns in the "to da moon!" cheering section:

"China's confirmation that its gold holdings have risen to 1,054 tonnes was not surprising given the broad rise in all the country's reserves, John Lipsky, first deputy managing director of the International Monetary Fund, said on Friday. "Not so surprising considering the very rapid increase in the overall level of Chinese external reserves, that it probably increased its holdings of all forms of reserves," Lipsky said when asked whether China would be in the market to buy 403 tonnes of gold owned by the IMF. The IMF last year approved the sale of 403 tonnes of gold from its stocks of 3,217 tonnes (103.4 million ounces) as part of a plan to put its finances on a sounder footing and create an endowment with the proceeds."

And now, time for some simple math: 454 tonnes in perspective. The IMF’s budgetary shortfall sale involves 403 tonnes. Now that China has already bought 454 tonnes over the past five years, and assuming that they continue to amass 91 tonnes per annum from here on out, well, the 403 IMF tonnes will require another 5 years to be absorbed (if by China alone, and at that pace).

Not exactly what the IMF has in mind, revenue-wise. Its need for cash is like, for yesterday's balance sheet. In no way does this address the potential quest for finding a home for the possible 3200 tonnes of gold to be let go by the IMF, in the event the Indo-Chinese proposal for mobilization we reported a week ago turns out to become a reality.

Thus, we caution once again: DO not get carried away with romantic visions of Beijing abandoning its ever-growing pile of greenbacks for equivalent-sized mountains of shiny gold bars. IF the government decides it ought to have more bullion in the basement, it will go about acquiring the same, much in the manner it has just done over the past five years; quietly, in a manner that does not make waves, and pretty much regardless of price levels at any particular time.

Wishful calls for 2000 or 3000 tonnes of gold as the minimum ‘proper’ gold reserve level for China (given its size on the international economic scene, as well as that of its reserves) will remain just that; wishful visions. The Chinese have indicated all along that “If we buy gold, you will not really notice? and also that “If we accumulate too much of it, we could be stuck with illiquidity in a crunch.?

Are we all for higher levels of Chinese reserves in gold? You bet. An important country such as China should continue to seek to diversify its massive holdings. And, so should the average investor. But, not with the disingenuous idea being planted in their head that this is a sign of any fuse being lit under gold. It's just, insurance being bought, folks. A little bit at a time.

Does it mean that gold's ultimate salvation will come from Beijing or Mumbai? Not likely. By the way, based on analogous thinking, one can easily extrapolate that if the Chinese ever really come to a point where they need to sell some of this gold pile, they will do so in the same discreet manner in which they have (it is now being learned) been accumulating it. Hats off to them. Perhaps other central banks can learn how this is done. It probably involves very little training. But the PR, well, that's a whole different issue...

Nice weekend to one and all.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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