China and Gold Reserves...Here is a post I made on another BB while in discussion with someone of what China would do with their excess USD's. It is quiet here now, and since this post is relevant to China, I thought I would repost it here and give some food for thought.
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You are right T#1. Nobody knows what China would do with their Foreign Reserves. Since the USA is China's largest export buyer, it is in their best interest, as well, not to let the USD fall. It stands to reason that if the USD were to drop dramatically, their Chinese Goods would become more expensive, and the likelihood of selling less products to the USA would then exist.
This is the same problem Canada faces with the USD for umpteen years. In our case though the Canadian Dollar floats on the open market whereas the Chinese Yuan does not. The big advantage we have is most of our Export Products are trading in USD anyway. Like Oil, Gold, Wheat, etc. So it doesn't impact us as much as it would China.
So our export problems to the USA rely on more than one factor. A strong Canadian Dollar, or a week USD, or low Commodities Prices can hurt exports. This is also why the Prime Lending Rates in Canada is at least 1% below the USA Rate right now, and why Japan only has a Prime Rate of ~0.5%.
The exporting of Manufactory Jobs is not a new phenomena but has increased over a number of years. I remember as a child that anything that came from Japan and then Hong Kong, was considered cheap junk. The clothing and textile industry moved to Thailand next, then on to India, Mexico, and as these countries developed wealth, and became more expensive, on to China. Maybe the last hold out.
Robert Cohen hints that China will buy more gold and did not say at what percentage but he did take an educated guess and said 7,000 tonnes. So where did he come up with such a figure, or is it just a wild guess?
What I think Rob was making reference to is what other European Central Banks and the IMF are holding as in gold percentage. The World Gold Counsel says that on average Central Banks hold approximately 10% of their Foreign Reserves in Gold. I think the USA holds 70% though, but I do stand to be corrected here. Since this changes from time to time, this can only be used as a estimate and Ball Park Figure only.
Rob said that China presently holds less than 2% (I believe 1.8%) of their total Foreign Reserves in Gold. What he indicated was that if China were to hold the average Gold Reserves, of 10%, they would need to buy at least 7,000 more tonnes of gold. When you consider that the world mine supply is only ~2,500 tonnes per year, this is a lot of Gold. Since Japan also holds under 2% they to would need to buy an additional tonnage as well.
Will China and Japan actually buy that much more gold? I don't know. But I think we both agree they will buy more. It is probably true that China will not buy this gold on the open market, and will increase their Gold Reserves from some of the gold they produce, but the effects are the same. They would be removing 7,000 tonnes from the open market by not selling this gold on the market, and buying it themself.
As far as gold being in Foreign Reserves the Central Banks hold about 32,000 tonnes while European Central Banks hold about 39% of this, the USA 26%, the IMF 11%, and so on. Asia on the other hand only hold 6%.
Robert Cohen really can't say how much China will hold in gold in their Foreign Reserves as no two countries are the same. Iceland for example hold 8.8% of its GDP in Reserves, while Canada holds only 3.8%, and since these numbers are constantly changing, as well as what percentages they hold in Reserves, nobody knows for sure.
But the main reason why any country would even hold Foreign Reserves, in the first place, is to protect themselves (their currency) in bad financial times, inflationary times, or a catastrophe.
By far the largest held currency in the world is the USD, which accounts for about 65% of all holdings. Next would be the Euro, then Japanese Yen, and of course Gold. The Gold Market compared to the Currency Market is only a small fraction by comparison.
So to protect in times like this they need to diversify. Holding just one foreign currency is not enough protection as yours and theirs can falter together. As it would in China, and Canada to for that matter. This is why China would want to hold several different currencies, and gold, in set percentages, as they are smarter than us, when it comes to money.
When these governments receive more currency from a nation that they may not want to hold, they will sell some and buy others. China is a good case in point. With this huge trade deficit with the United States, they find themselves with excess US Dollars. As you mentioned they chose to buy more Euro to balance this a little bit.
Keep in mind a country holds these Foreign Reserves in set percentages. If China wants to hold 60% in USD and maybe 15% in Euro, 15% in Japanese Yen, 5% in other currencies, and 5% in Gold, if they double their total reserves all in US Dollars their new holdings would be 80% USD, 7.5% Euro, 7.5% Yen, 2.5% others, and 2.5% gold. This is probably why the Gold held in China has dropped to under 2%.
So as you can see from this, and to maintain balance, they would have to buy more of these other currencies and gold also, by using these excessive US Dollars. Here is a LINK that shows exactly this when Russia did this.
https://en.rian.ru/russia/20051128/42241821.html
Another good write up on this is this LINK
https://www.gold-eagle.com/editorials_05/hommel121005.html
Will China hold 10% of their Foreign Reserves in Gold? Nobody knows for sure, as you said T#1. We do know if they did the price of gold would skyrocket.
But if Rob wasn't right, in that China would purchase 7,000 tonnes of Gold to be able to hold 10% in Reserves, even if China increased their holdings, from all this extra cash, to the Asian Standard of 6%, they would still need to purchase 3,500 tonnes of Gold.
With world mine supply being only at 2,500 tonnes per year, and the Central Bank Sales being 500 tonnes per year, this is still 500 tonnes above the total world supply. Even spread out over 7 years they would buy up all the Central Bank Sales for this time period, which expires before this time anyway.
GB