Monday the People’s Bank of China announced that it was going to become an aggressive buyer of Chinese national and regional debt securities in an attempt to spur economic growth that has slowed rather obviously in the course of the past several months. In other words, the PBOC is “all-in” for quantitative easing, which caught us and caught the markets off-sides. As soon as that report began to circulate, gold soared.
The question then becomes, “How important is China to the world gold trade?” And the answer is “Very.” China presently says that it has 1,054 tonnes of gold in its reserve position, making it the 7th largest official gold holder, surpassed last year by Russia which overtook China following Moscow’s gold purchases which we thought were intended to reduce Russia’s dependence on the dollar. Russia, officially, has 1,207 tonnes of gold in its reserve position and that gold is approximately 13% of the state’s overall “currency” reserves. China’s gold holdings, on the other hand, as a percentage of its total reserves are a scant 1%.
We suspect that the real level of Chinese gold reserves is much closer to 2,000 tonnes rather than the official 1,054 tonnes noted above and that China has been adding to those reserves surreptitiously via Hong Kong. By comparison, the US “officially” has a bit over 8,100 tonnes of gold on hand; Germany as nearly 3,400; the IMF has 2,800; Italy has 2,450 and France has 2,435.
However, perhaps most importantly of all Monday regarding the sharp rise in gold’s price… in dollar terms of course, but even more impressively in terms of the Yen and of the EUR… was the report that Venezuela apparently had no choice but to “pawn” a goodly portion of its own gold reserves to Citibank. We used this term in a conversation with friends at CNBC and we use it again here this morning for what Venezuela has done, apparently, is “swap” what may be a much as $1 billion of its gold reserves for a loan of cash. Call it what you will but Venezuela has effectively “pawned” its gold to Citibank.