The revelation of a jump in China’s official gold holdings to 1,054 metric tonnes is supporting gold prices and reviving fears that reserve diversification will undermine other dollar assets, notably US Treasuries.
But the news may be less significant than some people think, says Julian Jessop, chief international economist at Capital Economics.
“Gold was in a bull market from 2002 to 2008, so it is no great surprise that China was buying over this period. The reported amounts are also small compared to the production from China’s own mines, official sales by other central banks, and the record purchases by private investors via exchange traded funds,” he notes.
“What’s more, the fact that China has already increased its gold holdings by 75 percent does not necessarily mean further purchases and higher prices in the future. It would make more sense to announce an increase in gold holdings once a buying programme has been completed, rather than part-way through.
“We are also sceptical that the increase in gold holdings tells us anything about the plans for purchases of other assets. Even if all the additional gold were bought last year at the average 2008 price of US$872 an ounce, the total cost would only be around US$12.6bn. This is just a drop in the ocean compared with the total increase in China’s official reserve assets last year of US$419bn.”