PBoC Gold Reserve Increase?

The central bank has expanded its reserve twice in this century. December, 2001, saw PBoC add 3.41 million ounces to its reserve, boosting it from 12.67 million to 16.08 million. In December, 2002, the total reserve rose again, by 3.21 million ounces to 19.29 million ounces, a level that has remained unchanged for five years plus. 

The value of the central bank’s tidy stash has appreciated tidily.  In December, 2001, the price of gold closed at $280 an ounce.  On January 16, 2008, the quote on the London market was $900.10.

There would seem to be good reasons suggesting a larger gold reserve, and these have been trotted out publicly before both in 2001 and again in 2005.

An obvious one is the rising price. Secondly, sound institutions such as the US Federal Reserve and European Central Bank are supposed to hold a high proportion of gold in reserve. Thirdly, it is believed that the dollar-dominated international credit system is in danger of collapse, which could revive the gold standard.

But it is not obvious this is a fortuitous time to expand gold reserves. Having topped $900 per ounce, prices might rise through the roof if the international market sensed that China’s central bank was buying, enormously increasing the cost of expanding its reserve. And although gold prices have more than tripled in recent years, and have exceeded historical peak prices, gold may not be a valuable investment instrument in terms of rate of return if considered for a longer period, say 50 or 100 years.

The difference in gold reserves between PBoC and other major central banks might provide some motivation for China to expand its gold reserve. But the other reasons offered by those who suggest its increase are opposed by the majority of experts in China, who believe the gold standard is a gone goose which will never come back due to the deflation it would certainly inflict on the world.

At its founding in October, 2007, it was suggested that China Investment Corporation, China’s sovereign wealth fund, buy into gold. When First Chinese Business Daily, a Chinese business periodical, surveyed 60 Chinese economists, only 41.5% of the economists supported the move.

Worth noting is that while economists are skeptical, many Chinese are not. According to the statistics from Shanghai Gold & Jewelry Trade Association, total sales in 2007 of gold jewelry exceeded 16 billion yuan, and sales volume of gold ingots reached more than 2 tons, double the weight total of 2006.

China’s citizens are ensuring that China’s total stock of gold, official or not, is increasing, with or without PBoC participation.