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Posted by on Apr 30, 2015 in Market Insight

China’s Role In the Gold Market: Bigger Than You Think

China’s Role In the Gold Market: Bigger Than You Think

Dennis Gartman has been directly involved in the capital markets since 1974 and has been publishing his daily commentary, The Gartman Letter, since 1987. Mr. Gartman is a strategic partner with the AdvisorShares Gartman Currency Hedged Gold ETFs (GEUR & GYEN) and lends his institutional insight to educate advisors and investors about trading gold in different currency terms.

Monday the People’s Bank of China announced that it was going to become an aggressive buyer of Chinese national and regional debt securities in an attempt to spur economic growth that has slowed rather obviously in the course of the past several months. In other words, the PBOC is “all-in” for quantitative easing, which caught us and caught the markets off-sides. As soon as that report began to circulate, gold soared.

The question then becomes, “How important is China to the world gold trade?” And the answer is “Very.” China presently says that it has 1,054 tonnes of gold in its reserve position, making it the 7th largest official gold holder, surpassed last year by Russia which overtook China following Moscow’s gold purchases which we thought were intended to reduce Russia’s dependence on the dollar. Russia, officially, has 1,207 tonnes of gold in its reserve position and that gold is approximately 13% of the state’s overall “currency” reserves. China’s gold holdings, on the other hand, as a percentage of its total reserves are a scant 1%.

We suspect that the real level of Chinese gold reserves is much closer to 2,000 tonnes rather than the official 1,054 tonnes noted above and that China has been adding to those reserves surreptitiously via Hong Kong. By comparison, the US “officially” has a bit over 8,100 tonnes of gold on hand; Germany as nearly 3,400; the IMF has 2,800; Italy has 2,450 and France has 2,435.

However, perhaps most importantly of all Monday regarding the sharp rise in gold’s price… in dollar terms of course, but even more impressively in terms of the Yen and of the EUR… was the report that Venezuela apparently had no choice but to “pawn” a goodly portion of its own gold reserves to Citibank. We used this term in a conversation with friends at CNBC and we use it again here this morning for what Venezuela has done, apparently, is “swap” what may be a much as $1 billion of its gold reserves for a loan of cash. Call it what you will but Venezuela has effectively “pawned” its gold to Citibank.

This has been rumoured for several weeks, for Venezuela… run by the truly inept President Nicolas Maduro… is in the direst of fiscal straits. Weak crude oil prices and inept government policies have swept Venezuela’s stores of the most basic of needs, all the while as President Maduro has blamed the US for the problems his policies have caused.

At any rate, rather than openly selling its gold reserves into the market, Venezuela has been able to “pawn” its gold to Citibank, and the Bank has given the Venezuela government a loan for apparently $1 billion, with the gold as collateral. Venezuela shall have the right-of-first refusal to buy the gold back by returning the cash in question, but we suspect that in the end Venezuela will allow the gold to remain with Citibank and for the “pawn” to resolve itself that way. Almost certainly Maduro & Company will squander the $1 billion if the past is prologue.

Why then did gold rally on this report? Because a huge, prospective seller has been removed from the market. The market was concerned that Venezuela would have to sell its gold and would do so amidst panic; instead, the gold has now moved into far stronger hands and the market is relieved of this fear.