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China's Secret Gold Scam

Written By Geoffrey Pike

Posted April 27, 2015

china goldAccording to IMF figures, the U.S. government/ central bank has the largest holdings of gold reserves at 8,133 tonnes.

Germany is second with less than half that amount. Meanwhile, among countries, China ranks in 6th place with just over 1,000 tonnes.

The problem is that these figures are reported independently to the IMF by each country’s government or central bank. The IMF does not actually audit the reported reserves.

This is not a suggestion that the IMF should have that power, but just that the figures are suspect.

The U.S. has not updated its figures on gold reserves for almost 4 decades and there is no independent audit of the gold holdings. Meanwhile, China has not updated its figures since 2009 and there is much speculation that China has been increasing its reserves steadily.

Bloomberg News recently speculated that China’s holdings might have more than tripled since that time, estimating that its updated reserves may be closer to 3,500 tonnes, which would put the country in second place behind the U.S.

These numbers are obviously easily manipulated and we can’t really trust what we are being told, or what the IMF is being told. Different countries would have different reasons for underestimating or overestimating their actual gold reserves.

For some reason, the central planners that run the Chinese government are anxious to get the yuan approved as part of the IMF’s international currency basket. This is adding speculation that the government may want to disclose higher gold reserve numbers to help show the currency’s viability.

Of course, if China really wants to be taken seriously, it should start by actually allowing the yuan to be a free-floating currency. If it cannot be openly traded on exchange markets, it is not going to be taken too seriously internationally. It certainly isn’t going to be taken seriously as a potential reserve currency.

Where’s the Gold?

While it’s likely that China has increased its gold reserves significantly, it is not a lot compared to its total of nearly $4 trillion in foreign-exchange reserves. It holds over $1.2 trillion alone in U.S. dollars. Just to give some perspective, at $1,200 per ounce, one tonne of gold is worth just under $40 billion.

In the case of the U.S. government and the Federal Reserve, it is likely concealing its actual holdings in the other direction. What are the chances that the Fed is actually holding over 8,000 tonnes of gold?

Germany asked for a small amount of its gold back over a seven-year period and it looks as though that can’t even be accomplished. In all likelihood, the gold has been sold or leased out to bullion banks. It is possible that the Fed just can’t easily get it back because the price is so much higher now than when it probably let the gold go. However, there is no way for us to know right now because there is never an independent audit done on the Fed’s gold holdings.

So what are the ramifications of all of this? What if the U.S. doesn’t have any gold, or a lot less than the Fed says? What if China reports a large increase in reserves?

I think both scenarios can only be positive for gold investors. If it is ever found out that the U.S. has far less gold than reported, then the gold price will likely go up. It will mean a weaker dollar. It will also mean that the Fed will have to bid up the price of gold to get any of it back. It would also be a double whammy because the Fed would probably create money out of thin air to buy some if it back.

On the China side, a report of larger holdings will not likely drag the gold price down. It may even be the opposite.

First, if the Chinese government is buying gold, it probably isn’t going to just stop. It is obviously trying to diversify its holdings, so it will likely continue its buying.

Second, if the Chinese government needs to tap into reserves (which may be necessary if the Chinese economy hits a big recession soon), it will more likely sell off some of its currency holdings, particularly its U.S. Treasury holdings. This would just put pressure on the U.S. dollar, which would be good for the dollar-price of gold. Why would China sell its smaller gold holdings before selling some of its larger holdings of U.S. dollars?

I think China reports a lot of phony numbers, but this one may not be so bad. The Chinese economy is in for some trouble with all of its malinvestment that has taken place, especially with its ghost cities. There is little chance that the yuan is going to be taken seriously internationally as some kind of a reserve currency.

But this doesn’t mean that the Chinese government, along with the Chinese people, cannot heavily influence the gold market. Even with a down economy, I would not expect the Chinese to sell their gold. The American people would be wise to follow the Chinese on this one and diversify into gold for their own personal portfolios.