Gold Update: China Releases Data & Recent Price Drop

GoldDragonChina finally updated their official gold holdings on Friday, revealing a 57% increase from the previously reported figure, but less than what most analysts were expecting to see. China’s gold reserves totaled 1,658 tonnes at the end of June of this year, up from 1,054 tonnes reported in April 2009. Bloomberg had previously estimated their holdings could be as high as 3,510 metric tonnes based on trade data. While disappointing to many gold investors, the spot price of gold declined only slightly on Friday.

Although the release was welcomed, as many have been eagerly awaiting an update to China’s data, it may have raised more questions than it answered. For example, China had been “releasing” data previously, but reports showed no change in the gold reserves every single month for six years. Therefore, the data was false. According to their official release, it now looks like China increased their gold reserves by 600 tonnes in one month, which cannot be true as the spot price of gold could not have declined as it did with that much buying.

There is also the question of why China is now beginning to release data when it previously kept it secret. One reason may be the reports of China wanting the yuan to be included in the IMF’s “Special Drawing Rights” or SDRs – a basket of currencies that currently only include the U.S. dollar, euro, pound and yen. If they were included, they would need to report gold holdings on a monthly basis as the other countries that are part of the SDRs currently do.

Today, another story from China and the gold market has emerged. A sharp sell-off in gold occurred in Asia early this morning, which has sent gold down almost 2% to a five-year low. It appears there was 5 tonnes of the metal sold in just two minutes on the Shanghai index, where the average daily volume is around 25 tonnes. The reason for the selling is unclear, some suggesting a big fund was unwinding its position, or someone was forced to liquidate.

Desperate to explain the continued drop in gold, some are pointing to the recent Greek deal and bank reopenings, believing that the worst for Greece is over which lowers the demand for gold as a safe haven amid distress. Another reason analysts are moving away from gold is the belief that the Federal Reserve will begin raising interest rates by the end of this year, as early as September.

It is true all of these factors could have an influence on the price of gold in the short-term. But as we have stressed in the past, these incremental news stories are likely to only affect short-term futures prices and trading strategies (paper gold). But they have very little effect on the big picture and reasons for owning physical gold as an insurance policy and store of wealth for the long-run.

The fundamental reasons for owning physical gold is rooted in the belief that our fiat monetary system is inherently unstable; and as history has shown, prone to manipulation and inflation. The other fundamental factors connected to this is the growing debt and credit in our financial system, both in the private sector but especially in the public sector. These factors have not changed at all, even at the margin, and are in fact getting worse.

Of course it is true that the wider view one takes, the longer the time frame needed to see it through completion. Therefore we should expect the price of gold to continue to fluctuate, perhaps even wildly from day-to-day, month-to-month and even longer. That is why we also continue to stress keeping a set, relatively small, portion of your wealth in precious metals, and continue to slowly accumulate over time to even out the volatility.

Chris Kuiper CFA is currently a student and researcher at George Mason University, pursuing a Master’s of Economics. His previous experience includes asset management, investing and banking.