China keeps its gold reserves at home — is this a lesson for the rest of the world?

Gold reserves repatriate world China Venezuela
Venezuela’s government has found out the hard way that allowing other jurisdictions to store your gold can lead to a loss of control over them.

China’s official gold reserve holdings of 1,948 tonnes — although suspected to be much higher than that — are all held inside the country.

In fact, no one outside of China is quite sure where all that gold is, but the two most likely places are, one, the gold is held in vaults within the People’s Bank of China in Beijing or, two, somewhere else under the control of the People’s Liberation Army. Or, possibly both.

As the Venezuelan government has just discovered, allowing other jurisdictions to store your gold means the metal is, ultimately, controlled by those other jurisdictions.

Last week, the United Kingdom’s High Court ruled that Venezuela’s gold worth about US$1 billion (A$1.43 billion) belonged — not to Nicolas Maduro who retains the levers of power and controls Venezuela’s central bank but —to Juan Guaido, who last year declared himself acting president after his and other political parties said they did not recognise the 2018 election result.

More than 50 countries recognise Mr Guaido, but China and Russia are helping Mr Maduro keep power.

When the central bank in Caracas requested the Bank of England to repatriate the gold, the bank asked the High Court to rule on who was the rightful claimant — and the court found against the central bank and for Mr Guaido.

The Venezuelan gold in London represents an estimated one-third of its holdings. The administration of the late dictator of Venezuela, Hugo Chavez, repatriated 160t of gold from New York in 2011.

Venezuela gold Caracas Nicolas Maduro Guaido Bank of England
UK’s High Court has ruled against Venezuela’s government in a legal battle over access to its $1bn (A$1.43 billion) of gold stored at the Bank of England.

The Bank of England is the second largest holder of gold in the world (after the Federal Reserve in New York) and holds 99% of the Reserve Bank of Australia’s (RBA) 80t of official gold reserves. That 80t figure, by the way, includes gold on loan to other parties.

The Venezuelan central bank has also been blacklisted by the United States government, which last year warned bankers and traders not to deal in gold “stolen from the Venezuelan people by the Maduro mafia”.

In troubled times, countries move to bring gold home 

After war broke out in 1939, huge gold shipments were sent from France and other European countries to the US for safety.

But more and more, governments are these days moving their bullion back home. Plus, the threat of war is a distant second to concern about the fragility of the global financial system — and whether it keeps standing.

Between 2012 and 2017, Germany moved much of its gold reserves to Frankfurt, repatriating the bars from Paris and New York.

In 2017, the country announced it had completed a program of repatriating gold bars worth about US$31 billion from those foreign storage locations with the final 110t removed from Paris. The central bank had explained the gold move would help build “public trust and confidence”.

It was also a factor that much of the gold had been sent abroad during the Cold War in case of a Soviet invasion of the then West Germany, a threat that has lessened considerably since the Soviet Union imploded.

Germany is not alone, though.

Poland has repatriated 100t from London, thereby securing half of its reserves within Polish borders. Austria and some central European countries have also moved to store more of their gold at home.

Last October, the central bank in Amsterdam, De Nederlandsche Bank, updated its website with a message that could have been lifted from any one of those many gold bug websites.

“Gold is the perfect piggy bank — it’s the anchor of trust for the financial system,” the central bank proclaimed.

“If the system collapses, the gold stock can serve as a basis to build it up again. Gold bolsters confidence in the stability of the central bank’s balance sheet and creates a sense of security,” it continued.

It should be noted that “if the system collapses” is not a subject that central banks usually talk about in public.

The Netherlands hold 612t in official gold reserves — and, indeed, are building a new storage facility enclosed within a military base at Zeist.

The Dutch believe they have enough gold to cover an ultimate systemic risk and, just to be sure, they have divided their bars between various locations. They have 31% of the bars in the Dutch vault, the same amount again inside the Fed’s Manhattan underground vaults, and the remainder with the British and Canadian central banks.

That makes for a quite a different balance compared with pre-2014, the year the Dutch brought back gold from New York.

Gold reserves valued in times of economic peril

While the RBA clearly has no interest in building its gold reserves — they have remained at 80t since 1997, the year Australia’s central bank sold off two-thirds (or 167t)  of the nation’s gold reserves in a year when the gold price averaged US$331/oz — other central banks have not been so sanguine.

Two years ago, Hungary increased its gold holdings tenfold (although only to 31.5t). It has previously repatriated 3t from London.

Central banks last year added 650t to reserves. In 2018, the purchases totalled 656t, the highest central bank gold inflow in 50 years.

The big buyers have been China, Russia, Turkey, Kazakhstan and Uzbekistan.

Some commentators have made the point that some central banks — and they appear to be ones in nations where gold has long been held by individuals — see security in not only large numbers of gold bars, but having them under their own lock and key.

Global imbalance in gold holdings

There is still a great global imbalance in gold holdings. Ten countries control around 50% of global official gold reserves, in addition to which the International Monetary Fund holds 2,814t.

According to the latest figures from the World Gold Council, the United States tops the list with 8,133t, followed by Germany (3,363t), Italy (2,451t), France (2,436t) and Russia with 2,299t of gold reserves.

Rounding out the top 10 is China with 1,948t, Switzerland (1,040t), Japan (785t), India (645t) and the Netherlands at tenth place with 612t of total gold reserves.