ABC Bank: Run On The FED Highlights The Importance Of Gold Reserves

In order to strengthen the Chinese economy and protect it from external shocks the Chinese government has been stimulating its people to buy physical gold since 2001. Although they have been buying massive amounts of gold in the last years, their grams per capita still stands far lower than the global average. My lowest estimate is 4.3 g/c (which I wrote about in September), surprisingly Sun Zhoaxue, president of China’s biggest gold mine and the China Gold Association, spoke of roughly the same numbers:

The average Chinese person only holds 4.5 gram of gold, that is far below an average of 24 grams per person globally.

If we stick to Sun’s data, to get equal with the rest of the world China would have to import or mine another 25,000 tons of gold and allocate the biggest part of this among the population. The State Council uses the commercial banks as their main tool to distribute gold to the people. Through these banks, which are state-owned, individual investors can in example buy physical gold at the Shanghai Gold Exchange. Please click here and have a look at what gold products ICBC offers.

 

 

 

 

A crucial part of the government’s gold stimulating policy is education. This is from the ABC bank website:

Features 

1. Physical gold is both a commodity and a financial product. It can be a gift or collection and may serve as an important investment vehicle for realizing preservation and appreciation. With a distinctive preservation function, physical gold is powerful to defend against inflation. 

2. With good liquidity, it can be honored conveniently at the counter with low added cost and small honoring loss. 

3. Its price is open and transparent, following the trend of international gold price.

On this website I also found an analysis on the current status of gold in global monetary policy. I’ve asked my friend Soh Tiong Hum (click for his very interesting +Google page) to do a translation. Read how China is preparing for a new monetary order:

Because gold has capabilities to absorb external economic shocks, growth of its use in the international monetary system will be imminent.

Run On The Federal Reserve Highlights The Importance Of Gold Reserves


Agricultural Bank of China, LIU Zhongbo, January 28, 2013

The Bundesbank confirmed market rumors on 16 January 2013 that it plans to return German gold stored at the US Federal Reserve back to Germany. According to World Gold Council data, Germany owns 3396 tons of gold reserves, ranking second in the world after the United States. This gold is stored at the Bundesbank (1036 tons), US Federal Reserve (1536 tons), Bank of England (450 tons) and Banque de France (374 tons). According to plans from the Bundesbank, gold reserves held overseas will be returned to Germany in the next few years, gold reserves deposited in the US will drop from the current 45% to 37%.

This is not the first time Germany repatriated its gold. According to a report in October 2012, the German central bank returned 930 tons of gold stored in Bank of England a decade ago because of dissatisfaction with high management fees. The current plan is obviously prompted by concerns over the safety of the gold, the deepening European debt crisis and US debt ceiling and budget talks; Germany is becoming concerned about its gold held overseas and there are even talks the US Federal Reserve has used gold in its vaults that belongs to other countries. The Bundesbank’s action inevitably makes one recall the move by the French De Gaulle government to convert US Dollars into gold in the 1970s, a move that shows trust between Western developed countries diminishing. Gold reserves are an important part of a country’s international reserves but since the gold standard, gold’s position as a mode of international payment and reserve has been falling.

After the international monetary system moved from the gold standard to the post-war Bretton Woods system, gold withdrew from use for international payments while the US Dollar (as well as other currencies) took over. After the collapse of the Bretton Woods system and the 1976 Jamaica Agreement gold was formally de-monetized and from then on gold was no longer used directly for international payments. Countries that held gold could only sell gold through the international gold market or borrow money from institutions using gold as collateral so gold reserves could be changed into credit. In this kind of environment gold became an illiquid asset, the ‘gold is useless’ debate flourished in the 1990s, central banks sold their gold reserves and international reserves became visibly diversified.

In a crisis however gold remains the most important reserve and payment of last resort. The more serious the crisis, the more evident it is. For example, India pledged 46 tons of gold to IMF in order to receive loans for development; during the 1997 Asian Financial Crisis, South Korea campaigned its people to donate gold, eventually collecting 250 tons to exchange for foreign currencies and as a result received loans from the IMF to tide over the crisis. The plans from the Bundesbank to repatriate its gold is evidence that after several crises central banks are increasing their emphasis for gold reserves.
In comparison with Western developed economies China’s gold reserves are low. As at end of 2012 China’s has 1054.1 tons of gold, ranking fifth among other nations (IMF included ranking sixth). The US in first place (8133.5 tons) has a big lead in absolute terms but more importantly, China’s gold reserves make up 1.7 % of the total reserve only, far below the first four placed nations the US, Germany, Italy and France. Statistics show that China has at least 600 tons of gold deposited with the US Federal Reserve, equivalent to 56.92% of China’s total gold reserves.

To China, which has a lot of reserves, the repatriation of the Bundesbank is not whether we should consider if China’s gold is safe with the US Federal Reserve but whether developed economies will return to gold as an international reserve. Before discussing the preservation and growth of China’s reserves, we should be concerned about international reserves for debt settlement between countries and their currencies to support the basic properties. Because gold has capabilities to absorb external economic shocks, growth of its use in the international monetary system will be imminent.

 

Author : Agricultural Bank of China, Financial Markets

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