Has China Manipulated the Gold Market?

The financial press and blogosphere are still exploring the topic of Chinese reserves. Recently, some voices have arisen that China supported the recent plunge of the gold price in order to boost its reserves. Are these opinions justified?

The disappointment increase in China’s reserves led to a heated debate. On Friday, two articles were published (here and here), which suggest that China manipulated the gold market by under-reporting its official reserves to lower the gold price and increase its reserves.

Well, it is a very interesting twist in thegold perma-bull story. Perma-bullshave been saying for years that Western bankstersare behind the manipulation of gold prices, while China is a positive protagonist, who has been buying every possible ton of gold it could buy to undermine the financial control of Western central bankers. Now, the story is that China has handled the gold price, but do not worry – this is good handling enabling China to by even more gold and finally force the West into collapse.

This story makes even less sense when we realize that Russia is constantly reporting increases in its gold reserves (it added 800,000 ounces in June to its official holdings). Why do gold-bugs believe in Russia’s official holdings and do not accuse it ofprice manipulation? Is not Russia interested in the bankruptcy of the U.S. dollar as well as China? In one article linked above we can read: “Chinais not ready to unsettle the global currency market by announcing how truly large its gold holdings are, because that would call into question the value of U.S. dollars and could be seen as an attack on the dollar”. But Russia apparently is not afraid to reveal its gold reserves. There are also other problems with that suggestion. It implies that China generally wants to dethrone the greenback, but at the moment it is afraid to doso(but when will be the right moment for that?). It also impliesthat currency wars are not only about artificial depreciation to boost exports, but also about appreciation (by backing the currency withgold). Please,at least choose one version.

There is, however, one intriguing puzzle. The increase in gold reserves that the PBOC reported doesn’t seem to square with publically available reports on the amount of Chinese gold production and imports since 2009. According to data, China has produced over 2,000 tons of gold and imported over 3,300 tons through Hong Kong since 2009 (it has imported also from Shanghai, but the numbers are undisclosed). So where is the missing gold? Well, the mined and imported gold did not have to get to the official holdings of the central bank. China is a large country with a lot of entities interested in gold, so the yellow metal could simply get to citizens, banks, large companies and the Chinese Sovereign Wealth Fund.Although it is possible that a portion of Chinese gold could easily become a part of the official reserves ifneed be and that the PBOC is probably able to buy gold in the domestic market, the reality is that the official gold reserves held by the PBOC areonly 1,658 tons right now. The allegedly missing gold is not surprising, given the obvious fact that in a country inhabited by 1.4 billion people there are entities interested in holding gold other than the central bank.