Not All Central Bank Activity Negative
The biggest knock against gold is that central banks are net sellers. A common perception is that central banks will sell forever, keeping the price of gold below $300. Much of this perception springs from the Bank of England's highly visible three-year program of auctioning 415 tons (13.34 million ounces). With the last BoE auction to be held in March, a review of central bank activity in the gold market is appropriate.
Below is a table of the world's top 20 official gold holdings and the percentage of those countries' reserves that are gold, as of January 2002. (Data and calculations from World Gold Council). One metric ton equals 32,151 troy ounces.
After the BoE holds its final auction in March, only about 315 tons of gold will back the pound sterling, leaving the UK a notch above Lebanon on the gold ownership totem pole. With the UK completing its program, Switzerland becomes the only big seller, taking up 70% to 75% of the Washington Agreement on Gold limit of 400 tons a year. Unlike the BoE, the Swiss sell quietly, and despite the large amount being sold, the Swiss sales receive little publicity. The Swiss move 16 tons to 25 tons a month.
Over the last three years, gold bears used the BoE auctions to their advantage, constantly talking about them, presenting the notion that central bank selling will keep the price of gold forever from rising. Ignored are the central banks that add to their positions.
Although Russia announced in August 2001 its intentions to increase its gold holdings, China has simply added to its gold position. Currently, China and Russia are numbers 12 and 14, respectively. China is adding at a faster pace than Russia, and with China's massive paper reserves, it will probably move up a few more notches this year.
In December, China reported adding 105 tons of gold to its holdings, pushing net central bank acquisitions for the month to 71.4 tons, the first monthly plus reading in years. That was newsworthy. Yet, CMI doubts that any reader of this commentary has seen this development reported anywhere. (The World Gold Council, in its Weekly and Daily Commentaries did lightly touch on the matter, which prompted CMI to look further and resulted in this commentary.)
Note in the table that percentage holdings of gold for European countries, ignoring the UK, range from Spain's 13% to France's 44.5%, with an average of 31%. However, the average will decline slightly as the Swiss reduce their holdings. But, the important thing to look at is the low gold holdings of the Asian nations.
Japan has only 1.7% of its reserves in gold, Taiwan 3.1%, and China 2.1%. If one of these countries were to increase its gold holdings to the European average of 31%, the impact on the gold market would be massive. Consider China, which is adding to its gold position.
China now owns 500 metric tons, or 16.08 million ounces, of gold, which represents 2.1% of its total reserves. This means that China has about $4.43 billion in gold and about $206.5 billion in paper reserves. If China were to increase its gold holdings to the European average of 31%, it would have to buy about $65 billion in gold. At a static price of $275.50, $65 billion would buy 236 million ounces, which is 7340.4 metric tons, which would leapfrog China to the number two position, just behind the USA. Of course, the price of gold would not remain static if $65 billion went hunting for gold to buy. The price of gold would skyrocket.
CMI claims no inside knowledge as to how much gold China intents to buy. However, we do know that some Chinese economists have urged the Bank of China to increase its gold holdings, a move that reduce China's vulnerability to the dollar, which is overvalued.
If the Dragon has entered the gold market, the gold price manipulators can kiss their wallets good-bye.
Bill Haynes
January 25, 2002
This article is from Monetary Digest, Certified Mint, Inc.'s precious metals newsletter. The author has been a precious metals dealer since 1973. He can be reached at bill@certifiedmint.com His primary Web site is www.certifiedmint.com
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