Almost daily, we hear of a Chinese company buying another foreign gold mine, stories about Chinese gold imports, or China’s supposed goal of making the renminbi a reserve currency. I decided to see how much gold China would actually need to achieve a similar gold ratio in their foreign currency reserves as the United States.
First off, China holds over $3.2 trillion in foreign currency reserves, including gold. That is twenty two times the foreign currency reserves of the U.S., which stands at $150 billion. U.S. gold reserves total a little more than 8.133 tonnes, about 75% of foreign reserves.
Let’s say that China wants to hold 70% of their reserves in gold. China it notorious for not giving out info until it wants to. Their last report on their gold reserves was in 2009, when they claimed it made up 1.7% of reserves. Let’s be cautious, and say that they now hold 3% of their reserves in gold, taking into account their 400+ tonne annual domestic gold production, and all the widely-reported gold importing they’ve done in the last three years. 3% = $67.2 billion.
$3.2 trillion x 70% = $2.24 trillion
$2.24 trillion – $.o672 trillion = $2.1728 trillion
So, if China wanted to hold 70% of their foreign reserves in gold, they would need another $2.1728 trillion worth. If we take $1655/oz as the cost of gold (slightly above recent prices,) we get the cost of a tonne of gold as $53,529,750.
$2.1728 trillion / $53,529,750 = 40,590 tonnes of gold needed to give China 70% holdings in gold. According to the World Gold Council, total global gold holdings for February 2013 is 31.597.6 tonnes.
Well, obviously China can’t buy all the gold in the world (though they seem to be trying,) so let’s make some BIG assumptions. First, we’ll say that China is giving itself ten years to meet the 70% gold ratio. We’ll also say that gold will remain at $1655/oz for the entire ten years.
Let’s assume that China’s balance sheet doesn’t grow for ten years. We’ll say that they reinvest maturing U.S. treasuries in gold, for example. China’s domestic gold production in 2012 was 403 tonnes. Their announced plan is to ramp up production to 420-450 tonnes a year by 2015, according to Shanghai Securities News. Let’s be generous, since we’re carrying this out to 2022, and give them an average annual production of 450 tonnes, 4500 tonnes over ten years. 4500 tonnes at $53,529,750 a tonne knocks almost $241 billion off the needed amount ($240,883,875,000.)
$2.1728 trillion – $240.88 billion = $1.93 trillion, more or less.
$1.93 trillion / $53,529,750 = 36,055 tonnes of gold (rounded up a tad for wastage.) So, over ten years, China would need to import 3605.5 tonnes of gold a year at $1655/oz to hit the goal of 70% of foreign reserves in ten years.
This doesn’t take into account the projected domestic consumption of 1000 tonnes a year by 2015 that China is forecasting (again, from Shanghai Securities News.) At our theoretical $1655/oz price point, that’s another $53.5 billion in imports a year ($53,529,750,000.)
So, obviously, China can’t import 4600 tonnes of gold a year. A 70% ratio of gold in their foreign reserves in ten years isn’t possible. That doesn’t mean, however, that they won’t shrink their reserves while continuing to acquire as much as possible on the open market, while buying the means of production all over the world. Maybe they will aim for 50% over twenty years. In any case, we probably won’t see China stop buying a lot of gold every year for a long, long time. With so many billions of dollars each month the Western democracies are printing out of thin air, can you really blame them?