China’s secretive gold purchases help fuel record rally

Many gold analysts will not even hazard a guess as to the true scale of purchases by the People's Bank of China. Photo by Matthias Schrader/AP Photo/Postmedia files

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China’s unreported gold purchases could be more than 10 times its official figures as it quietly tries to diversify away from the United States dollar, say analysts, highlighting the increasingly opaque sources of demand behind bullion’s record-breaking rally.

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Publicly reported buying by China’s central bank has been so low this year — 1.9 tonnes purchased in August, 1.9 tonnes in July and 2.2 tonnes in June — that few in the market believe the official figures.

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Analysts at Société Générale estimate, based on trade data, that China’s total purchases could reach as much as 250 tonnes this year, or more than a third of total global central bank demand.

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The scale of the country’s unreported purchases highlights the growing challenges facing traders trying to work out where prices go next in a market increasingly dominated by central bank purchases.

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“China is buying gold as part of their de-dollarization strategy,” said Jeff Currie, chief strategy officer of energy pathways at Carlyle, who says he does not try to guess how much gold the People’s Bank of China is buying.

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“Unlike oil, where you can track it with satellites, with gold you can’t. There’s just no way to know where this stuff goes and who is buying it.”

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Traders say they are turning to alternative sources of data to gauge demand, such as orders for freshly cast 400oz bars with consecutive serial numbers — which are typically refined in Switzerland or South Africa, shipped via London and flown to China — for evidence of the country’s purchases.

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“This year, people are really not believing the official figures, especially about China,” said Bruce Ikemizu, director of the Japan Bullion Market Association, who believes China’s current gold reserves are nearly 5,000 tonnes, double the level it publicly reports.

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Central banks have been buying up huge quantities of bullion in recent years, fuelling a rally that has pushed the price above US$4,300 per troy ounce. Over the past decade, gold’s share of global reserves outside the U.S. has climbed from 10 per cent to 26 per cent, World Gold Council data shows, making it the second-largest reserve asset after the dollar.

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Yet fewer and fewer of these purchases are being reported to the IMF, which collects data voluntarily.

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In the most recent quarter, only about one-third of official buying was publicly reported, down from around 90 per cent four years ago, according to WGC estimates based on Metals Focus data.

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Central banks may choose not to report their gold activity to avoid front-running the market, or for political reasons. Some fear that publicly buying bullion, which is often a hedge against the dollar, could worsen relations with the Trump administration.

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“It makes sense to just report the bare minimum, if need be, for fear of reprisal from the U.S. administration,” said Nicky Shiels, analyst at Swiss refinery MKS Pamp. “Gold is seen as a pure USA hedge. In most emerging markets it is in central banks’ interest to not fully disclose purchases.”