China and their gigantic pile of gold

In an earlier posting in October, I looked at China's massive foreign reserves totalling over $2.85 trillion and their rather small level of government debt.  In this posting, I will examine their investment in gold.

As it stood at the end of 2009, the People's Bank of China held $37.1 billion in "monetary gold" as shown on this chart:

China currently owns 1054 tonnes of gold (3389 million Troy ounces), up from 600 tonnes  in 2003.   By comparison to its foreign currency reserves, China's gold holdings are relatively small making up only about 1.6 percent of their total reserves.  This ownership places China in fifth place among gold-owing countries in the world.  Here's a list showing the reserve holdings of the top 5 countries and the European area along with some other countries of interest and their placement effective Q1 2010 (data from the World Gold Council website):

1.) Europe - 10793 tonnes

2.) United States - 8133 tonnes

3.) Germany - 3409 tonnes

4.) IMF - 2981 tonnes

5.) Italy - 2452 tonnes

6.) China - 1054 tonnes

8.) Japan - 765 tonnes

9.) Russia - 664 tonnes

11.) India - 558 tonnes

17.) United Kingdom - 310 tonnes

78.) Canada - 3.4 tonnes

In the case of China, an additional 3000 tonnes of gold are held privately by individual investors.

As a Canadian, the rather insignificant amount of gold reserves held by the Bank of Canada  shocked me, especially in light of the fact that Canadian gold mining companies are particularly well known to investors around the world, specifically, Agnico Eagle, Barrick and Goldcorp.  

Let's take a look at which countries mine the most gold.  China is the largest gold producing country in the world, producing 300 tonnes of gold in 2009, up over 62 percent since 2001.  Here's a list showing the top gold producing countries and their 2009 gold production volumes:

1.) China - 300 tonnes

2.) Australia - 215 tonnes (peak production in 1998)

3.) United States - 215 tonnes (peak production in 1998)

4.) South Africa - 210 tonnes (down from 402 tonnes in 2001)

5.) Russia - 185 tonnes

6.) Peru - 180 tonnes (15.5 percent lower than the peak in 2005)

7.) Indonesia - 100 tonnes (down 23 percent from 2001)

8.) Canada - 95 tonnes (down 43 percent since 1991 despite having half of the world's gold mines)

Both Russia and China are now producing at their peak rate; many other countries are experiencing dramatic declines in production rates as noted above.

China and India are both large consumers of gold.  Interestingly enough, according to the World Gold Council Gold Demand Trends August 2010 publication, gold bar hoarding by Chinese retail investment demand led to a 29 percent increase up to 96.3 tonnes during the second quarter of 2010.  China noted an increase in retail gold investment of 121 percent year over year to 36.3 tonnes, with the demand for bars and bullion coins more than doubling despite the massive price increases.  Total consumer demand for jewellery and retail investment for the 12 months ended Q2 2010 for Greater China (includes Hong Kong and Taiwan) was 532.1 tonnes, up 22 percent year on year.  China's consumer demand for gold is second highest in the world with India having the highest level of consumer demand.  In the same 12 month period as noted above, India's consumer demand reached 755 tonnes, also showing a 22 percent year on year increase.  To put these numbers into perspective, United States consumer demand was 247 tonnes, down 13 percent year on year.  Canada does not even make the list of consuming nations.

In conclusion, China is consuming all of its gold production and twice the level of Canada's annual production.  In addition, China has asked the International Monetary Fund to sell its entire reserve of 3217 tonnes.  In February 2010, China purchased 191.3 tonnes of IMF gold when the IMF announced its intention to sell 403.3 tonnes of gold in September 2009.  Most of the balance, 200 tonnes, was purchased by India.

We can see that China and its citizens consider gold to be a relatively important part of their overall assets.  Perhaps there is something that we can learn from the East as both individuals and as governments, especially in light of the massive sovereign debt levels being accrued by the United States, Japan and the United Kingdom.