China's massive gold purchases may actually be underestimated, and will likely continue for many years - BMO
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(Kitco News) - Even after buying 126 tonnes of gold so far in 2023, China still has a long way to go as it builds up its official reserves, according to analysts at BMO Capital Markets.
"Our analysis would certainly suggest that above-ground reserves of gold in China, both privately owned and those owned by the central bank, are significantly higher than annual consumer demand and official purchases might suggest," said Rory Townsend and Colin Hamilton, the authors of the report. "However, given the geopolitical backdrop and concerns over U.S. dollar dominance, we view further net additions to gold holdings as highly likely."
Currently, the People's Bank of China (PBoC) has the seventh largest gold reserves in the world at 2,113.50 tonnes, representing about 3.8% of total reserves. Analysts have speculated that the central bank is looking to increase its gold holdings to at least 5% of total reserves.
"At today's gold prices, this would require an additional 638t of PBoC purchases above current stated holdings," the analysts said.
In comparison, the U.S. has the world's largest gold reserves at 8,133.50 tonnes, representing 68.2% of total reserves.
However, BMO noted that the 5% target could be a little dated, given the sharp rise in geopolitical uncertainty in the last few years. Towsend and Hamilton said that another potential target could be the nation's M2 money supply, which would mean significantly higher amounts of gold.
"In the U.S., M2 money stock was ~$21 trillion in June, and as such, U.S. official gold holdings would equate to 2.4% the relative value," the analysts said. "If PBoC gold holdings were to represent the same relative value against China's M2 money stock, it would translate to gold reserves swelling to 15,320t, representing an uplift of 13,183t on officially stated reserves."
However, BMO also noted that it may be nearly impossible to determine China's true holdings of gold. They pointed out that the nation's private and above-ground reserves could be around 24.4 tonnes.
"Based on the World Gold Council's estimate of global central bank demand last year (1,136t) and reported purchases in IMF statistics, approximately 65% of gold additions were unreported. It is widely thought that China and Russia likely account for a notable portion of this difference," the analysts said.
Although a clear picture of China's gold reserves may be impossible, analysts at BMO expect that the PBoC will continue to be long-term buyers, even if those purchases aren't reported. The analysts noted that central bank demand should also continue to support the gold market's long-term bullish trend, and should also start to attract retail investors.
"Central bank purchasing may not drive short-term pricing dynamics; however, structurally higher net additions should help to set a higher price floor than seen historically.
We also see that additions by central banks have helped to assuage investor concerns over gold's long-term importance as an asset class, something which two years ago was being increasingly questioned. As such, robust central bank buying could also see a concurrent rise in physical retail investment demand," they said.