Gold remains defensive, dropping to a three-week low of 1279.30. The yellow metal is being weighed by outflows from ETFs, as the stock market recoups recent losses and it looks increasingly like the west is not going to take any meaningful action to contain Russia.
Some speculators had moved into gold in recent weeks as a risk-aversion trade, after stocks became volatile and it looked increasingly like Russia might intervene in eastern-Ukraine. These specs regained some risk appetite following the four-party agreement reached in Geneva last week to deescalate the situation in Ukraine.
However, evidence surfaced subsequently that Russian forces are already active in eastern-Ukraine. They are basically following the same plan they used in Crimea. So, while in reality the situation is actually escalating, the market is already losing interest in the story. Many seems to be conceding that more Ukrainian territory will be lost to the Russians.
We noted in yesterday’s comment that gold coming out of the ETFs would likely follow the well-worn path to China. Much of the gold that has come out of the ETF vaults in London went to Switzerland to be re-cast into Asian friendly kilo bars and then went through Hong Kong to the PRC.
Those flows were pretty transparent, thanks to monthly export data reports from Hong Kong. However, Reuters reported yesterday that China is now importing gold directly through Beijing. This may be a purposeful effort to mask how much gold it is buying for official reserves.
China surprised the world in 2009 when it announced its official gold reserves had surged 76% in six short years to 1054 tonnes. Suddenly everyone took an interest in Chinese gold buying. Last year China imported about 1160 tonnes of gold through Hong Kong, with the whole world watching.
Reuters notes that estimates of China’s current gold reserves range from 3000 to 5000 tonnes. However, when and if China announce reserves again, I wouldn’t be surprised if we were all surprised yet again.
The motives behind China’s massive accumulation of gold seem pretty obvious. China wants to diversify its reserve asset holdings. They are over-allocated to dollars and U.S. Treasuries. In diversifying into gold, they not only seek protection from dollar debasement and ridiculously low yields on Treasuries, but they also look to simultaneously solidify their position as a global economic superpower. And possibly one day, the yuan might significantly erode the ‘exorbitant privilege’ the dollar enjoys as the global reserve currency.
The motives of the individual investors we service here at USAGOLD are very similar. They too are seeking to preserve the wealth they have accumulated. In light of dollar risks and the pitiful yields available on bonds and traditional savings vehicles, having some gold just makes sense.