Commodity Online
China announced in April that the country had increased its gold reserves by 454t, to 1,054t. The news has rekindled gold market hopes that China is to become a large purchaser of bullion. How much more gold should China acquire now?
Here is an analysis from Fortis Metals Monthly
The advanced economies in Europe and North America (here termed .advanced economies excluding Asian 54), hold most of the world.s official reserves of gold (20,541t out of a total of 29,602t) and that makes up a high share of their reserves (47.5%).
No other region holds more than 10% of their reserves in gold, with the Middle East next highest at 8.7%. If we look at it on a per capita basis, it is reasonably similar. The advanced economies (excluding the Asian 5) have vastly more official gold than any other region, at 26.4g per capita, with the Asian 5 next on 6.3g per capita and then the Middle East at 3.6g per capita. China has just 0.8g per capita, the world 4.5g.
When looking at forex reserves, things are somewhat different, with China having $1,463 per capita, and three other developing country regions having more than $1,000 per capita. This is more than the advanced countries, which have $843 per capita. That excludes the Asian 5, who have a huge $8,805 per capita. The world average is $1,022 per capita.
Finally, if we look at these trends as a per unit of GDP, the advanced economies have gold reserves worth 1.7% of GDP, the Asian 5, 0.4% of GDP, and the emerging and developing economies range from 0.4% for the western hemisphere (South and Central America) to 1.5% for the Middle East.
Here China’s 0.7% does not seem so low, although if we use GDP measured at purchasing power parity that falls to 0.5%. This measure shows up just how much forex reserves some of these countries have, however, with China.s stash equivalent to 44.2% of GDP at market prices or 32.6% at PPP. This dwarfs just about anywhere else, although amounts range from 11.8% of GDP at market prices (Western Hemisphere) to 26.7% (Africa).
The advanced economies, excluding the Asian 5, have about 4%, the Asian 5 more than 20%.
On any basis therefore the distribution of gold reserves as a percentage of total reserves is very irregular. In terms of per capita it is almost as irregular.
However when measured as a percentage of each region.s GDP it is rather less so. To match the world average of gold as a percentage of foreign reserves
4 The Asian 5 are the IMF.s advanced economies from Asia, which are Japan, South Korea, Hong Kong, Taiwan and Singapore. We have separated them out as they have large forex reserves but little gold.
China would need to acquire nearly seven times more gold than it has currently, about 7,500t. To match the world average in terms of grammes per capita, it would need just under six times as much, at about 6,000t. To match the global average of gold as a share of GDP it would need a smaller amount, about 2,100t to 2,400t.
It is not obvious which of these measures is most useful. To judge China’s gold holdings in terms of a percentage of foreign reserves it may not be that China has too little gold, but that it has too much forex. The per capita measurement does not take into account how rich a country is.
The measure that considers gold as a percentage of GDP would make more sense if one sees gold as apart from foreign exchange reserves, there as a store of value, war chest and for use in national emergencies, rather than for more frequent events such as currency market intervention or the purchase of imports.
Yet even if we did accept this it still begs the question of whether the world average is correct. After all, countries have been net sellers of gold in most years since the mid-1960s, and although it does look as if sales are slowing, it is still too soon to say that trend is over; on any of these measures the US and Europe still have rather more gold than seems appropriate. The stockpiling of gold by national treasuries rather goes against the privatising instinct of much of the world since the late 1970s.
One guide, perhaps, is the percentage share of the entire world’s gold that is owned by central banks. This has been in decline since the mid-1960s, not just because of the general trend towards offloading bullion reserves, but because gold mine production has continued and indeed accelerated. By now, less than 20% of the world.s gold is held by official institutions, a remarkable figure but down sharply from its heyday, when more than half was in state hands.
However, it might also understate the official sector.s importance, as a fair chunk of the privately-held gold is held in forms rather a long way from financial assets, such as in electronics, or Western high mark-up jewellery. If one looks at US Treasury debt, then about 30% of that is held by foreign governments, a not dissimilar share to the proportion of investment or nearinvestment gold held by central banks.
Courtesy: Fortis Metals Monthly
