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Russia And China Increase Gold Holdings

Published 10/27/2015, 08:32 AM
Updated 07/09/2023, 06:31 AM
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Even though the price of gold failed to make a decisive break above the 200 day Moving average, the price looks set to continue its upward trajectory. However, one can expect some resistance close to the 200 day MA at around the $1185 an ounce level.

After briefly breaching $1190 an ounce level, gold prices came under some renewed selling pressure as the U.S dollar gained against it major peers, especially the euro.

The rally in the greenback was sparked when European Central Bank (ECB) president Mario Draghi announced that the central bank would not cut rates, but at the same time, he strongly hinted that they would act later this year. The ECB left the main refinancing rate unchanged at 0.05%. The marginal lending rate also stayed unchanged at 0.3% and the deposit rate at -0.2%.

At the press conference, President Mario Draghi acknowledged that the QE program has been "proceeding smoothly" but also suggested that the ECB is concerned about the slowdown in emerging markets, and as such, the central bank would re-examine its bond buying program in December.

According to Draghi, the ECB could extend its current programme of Euro-QE beyond its current expiration date of September 2016 or even cut interest rates deeper into negative territory. The bank’s deposit rate is currently minus-0.2%.

That caused the euro to plunge by two full cents against the U.S. dollar. But, the US dollar was also boosted by the dovish actions from the People’s Bank of China (PBoC) and the Bank of Canada.

Last Friday, the Chinese central bank cut interest rates for the sixth time in less than a year, and it again lowered the amount of cash that banks must hold as reserves in a bid to jump start growth in its stuttering economy. Specifically, the PBOC cut its one-year lending and one-year deposit rates by 25 basis points. It also cut the bank reserve requirement ratio by 50 basis points, theoretically freeing up banks to do more lending.

Monetary policy easing in the world's second-largest economy is at its most aggressive since the 2008/09 financial crisis, as growth looks set to slip to a 25-year-low this year of under 7%.

The announcement by the PBoC sent stock markets worldwide soaring on Friday. Shares across Asia, Europe and the Americas climbed, having already been boosted by Thursday's message from ECB chief Mario Draghi that the central bank was ready to adjust "the size, composition and duration" of its quantitative easing program.

The BOC meeting turned out to be more dovish than expected. While leaving the overnight rate at 0.5%, the central bank trimmed its growth forecast for 2016 and 2017, and pushed backward the timing of the economy's expected return to full capacity to mid-2017.

While global stock markets have rebounded, I do not think that real economic growth in the US is anywhere near what is claimed by the popular financial news media. And, as far as I am concerned, the expansionary policy of the ECB is an abject failure! It didn’t boost European growth, nor did it boost European inflation, with prices falling 0.1% in September.

Meanwhile in the physical gold market, withdrawals from the Shanghai Gold Exchange following the Golden Week holiday still remain strong. An impressive 53.4 tons was withdrawn in the week ending October 16th - week 40 - the first full week after the holiday. The year to date figure is a fraction short of 2,062 tons.

Looking at past years, demand does tend to fall off by a little at this time, but then picks up again as the year-end nears as stocks increase ahead of the Chinese New Year buying spree. Next year, which will be the year of the Monkey under the Chinese zodiac - falls on Monday February 8th, suggesting strong gold demand in December and January.

In Chinese astrology, the Monkey is a symbol of health and wealth and those born under the influence of this sign are said to be intelligent, quick-witted and adventurous.

On the figures to date, it looks as if the total of withdrawals from the Shanghai Gold exchange for the full 2015 year will likely reach 2,600 tons or more - a huge new record, probably over 400 tons more than that of the previous record year of 2012 when 2,181 tons were withdrawn from the Exchange.

Gold consumption in mainland China may match or exceed the record in 2013 after financial-market turmoil and the yuan’s devaluation boosted the metal’s appeal, according to Haywood Cheung, chairman of the Chinese Gold & Silver Exchange Society, which also saw higher sales at jewelers in Hong Kong.

According to Cheung, demand in Hong Kong may expand 25% this half after a lack-luster first six months, he said in an interview. The decline in 2013, when bullion sank 28 percent, spurred increased buying across Asia, and 2015 is shaping up well and may surpass that year’s total, according to Cheung.

When you consider gold withdrawals from the SGE as well as the flows from China, one thing is certain and that is the demand for gold by China remains enormous.

Yet, despite the massive demand for physical gold from China, and as gold flows from West to East, the futures market of Comex is still largely responsible for setting the gold price. But, the more the Chinese become involved in the global gold price mechanism the more their influence will rise in determining the actual price given these massive gold flows. This of course will lead to a more credible reflection of prices as they will be determined according to the correct fundamentals and not simply by a few bullion banks that simply create price distortions.

But, it is not only the Chinese that have been adding physical gold to their reserves. Russia has been consistently increasing its holdings of the precious metal.

Russia added another 34.2 tons of the precious metal in September. This follows on the heels of a 1 million ounce increase in Russian gold reserves in August.

Since the global financial crisis, Russia has increased its gold reserves at an average pace of about 300,000 ounces per month. And, other countries formerly part of the Soviet Union have also increased their holdings of gold.

According to Bloomberg, Kazakhstan increased its gold reserves for the 35th straight month in August. The country purchased about 2.1 tons to bring its stash to roughly 210.2 tons. Belarus also expanded its reserves to 47.1 tons that same month.

And despite being broke, the National Bank of Ukraine added 30,000 ounces of gold to its reserves in September, bringing its total stash to about 27 tons. The value of the country’s gold holdings grew by $41.96 million, to $989.78 million.

As Russia is a gold producer, a way to build international reserves is via buying domestically mined gold. This way this gold will not enter the international market. In a way it reduces its dependency on the US dollar for international reserve building.”

Gold offers that same traditional hedge to individual investors as well as central banks.Today’s financial system where unelected central banking elite conjures trillions of dollars and euros out of thin air cannot continue for ever. It has an expiration date. And gold, with its millennia-long history, is making a comeback.

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