China's Gold Price Floor

It is a reasonable bet that China's central bank likes to buy on weakness...

WHAT TO make of China's gold strategy? asks Dan Denning for the Daily Reckoning Australia.

Sun Zhaoxue is the head of the state-owned China National Gold Corporation. According to the Financial Times, he recently wrote an article in the leading academic journal of the Chinese Communist Party (CCP) that may tell you exactly how China views gold. So then, how exactly does the CCP view gold?

'As gold is a currency in nature,' writes Sun, 'no matter if it's for state economic security or for the acceleration of Renminbi internationalization, increasing the gold reserve should be one of the key strategies of China.' 

For China to have a seat at the table when the world's next monetary system is negotiated, it will have to have more gold. China last reported official gold holdings in 2009. At that time, the People's Bank of China revealed it had accumulated 1,054 tonnes — or a 75% increase from when it last reported in 2003 at 600 tonnes.

The 2009 figures leaves China with just 1.6% of its total foreign exchange reserves in gold. That number needs to be closer to 10% to be on par with some European countries. And the US has over 70% of its reserves in gold. Do you see where this is going?

China bought at least 400 tonnes of gold between 2003 and 2009. But it didn't advertise its intentions. You can be pretty sure it bought on weakness, when others were selling. We'd be willing to bet China's done a lot of gold buying in the last 12 months, with gold trending lower off an all-time high.

Sun argues that gold is a 'strategic resource as important as petroleum energy'. And even if he's talking his own book as the head of a gold company, China's gold accumulation is part of a larger story. Central banks around the globe are Buying Gold too. This has helped put a floor under the Gold Price.

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