WHO OWNS ALL THE GOLD? / MACLEOD FINANCE

Who owns all the gold?

For the last four decades, China has been cornering the physical gold market. Now that the West is turning bullish, where will the gold come from?

ALASDAIR MACLEOD

The sums concerned at this stage of gold’s bull market are staggering. 

Large American banks manage portfolios worth trillions, and their analysts are belatedly turning bullish on gold. 

Already, demand for ETFs is picking up, and mining indices have doubled this year from depressed levels. 

A tsunami of currency is just beginning to roll gold’s way. But where is the gold going to come from?

You may need to read this article twice for its implications to sink in.

China has cornered the market

The problem with analysing gold ownership is that those that own it don’t want to be identified — whether it be individuals concealing their wealth, or entire governments for economic or geopolitical reasons. And since the death of Mao, if not before, China has been Hotel California for gold: gold flows in freely but never leaves.

Before the Shanghai Gold Exchange was opened for business in 2002, private individuals were banned from gold ownership. 

Yet it was clear that before then the state’s gold policy was to develop gold mining, turning China into the largest global miner by far and doré was also imported for refining by state-owned refineries from elsewhere, never to leave.

The regulations appointing the Peoples Bank (PBOC) with sole responsibility for gold and silver date from 1983. 

At that time, gold was in the early stages of its massive post-seventies bear market, so supplies from disillusioned western investors were readily available at declining prices — ideal conditions for concealing a large, dedicated buyer.

Additionally, bullion was being leased and sold into the market by hedge funds to fund a carry trade into US T-bills, estimated by analyst Frank Veneroso to have amounted to between 10,000 and 14,000 tonnes by the year 2002. 

Veneroso quipped that this bullion was probably adorning the necks of Asian women. More likely, it was quietly being picked up by the PBOC.

The PBOC had monopoly responsibility for foreign exchange dealings, so it was a simple matter to divert a portion of these substantial capital and trade flows into purchases of gold. 

Bearing in mind that contemporary prices declined from about $430 to $260 per ounce between 1983—2002, only 10% of these net currency flows would have led to the acquisition of between 20,000—25,000 tonnes, secretly distributed between various government accounts.[i] 

This is not to be confused with the PBOC’s own gold reserves.

Whatever the actual amount, the Chinese leadership decided that they had accumulated sufficient gold to allow the public, hitherto banned, to buy gold. 

The Shanghai Gold Exchange (SGE) was opened for that purpose in 2002. 

However, it is clear that the state continued to accumulate gold when it was offered by western markets and refiners.

Between 1983 and 2002, above ground stocks of gold increased from 91,916 tonnes to 132,976 tonnes. 

With the additional supply from disillusioned investors in the West, it was certainly possible for China to accumulate gold on this scale.

We cannot know how much gold has been additionally accumulated by the state since 2002. Import-export statistics only cover non-monetary gold. 

All China needs to do is to categorise it as monetary for it not to be recorded. 

But given the increased pace of global mine production, and global scrap supplies together with her own mine output of 7,578 tonnes since 2002, a further accumulation of 15,000—20,000 tonnes of state-owned gold is easily conceivable.

There are two other sources of Chinese demand to account for. 

Since 2002, Chinese citizens have withdrawn 27,300 tonnes from SGE vaults, mostly turned into jewellery. 

Secondly, the banks offer gold accumulation accounts alongside deposits, which together with other investment schemes are backed by gold remaining in the SGE’s vaults. 

Given that household savings are estimated at over 30% of GDP (about $5 trillion equivalent), that these funds are no longer buying into off-plan property development, and that banks have been reducing deposit account rates it seems reasonable to suggest that some 10,000 tonnes of investment gold have accumulated in SGE vaults since 2002, probably at an increasing pace.

New global mine supply over the 2002—2024 period was over 65,000 tonnes, exceeding our figure for total Chinese demand by about 10,000 tonnes. 

Given subdued demand from other markets, as a ballpark figure Chinese demand amounting to 55,000 tonnes seems reasonably close to the mark.

Putting all this together, our estimate for Chinese owned gold today totals 75,500 tonnes, including the PBOC’s reserves. 

It has been accumulated at an average rate of about 1,800 tonnes a year

Above ground stocks today are estimated at 198,094 tonnes, based on a paper prepared for Goldmoney by James Turk and Spanish economist Juan Castañeda in 2012 and updated by subsequent mine output. 

It is our source for accumulating above ground annually. 

This is some 20,000 tonnes less than other estimates, such as that of the WGC/GFMS. 

But we believe the Goldmoney calculation to be more accurate.

China’s total stake therefore represents 38% of all above-ground stock, probably over 40% allowing for gold which has been lost over the centuries.

Our estimate of China’s holdings are summarised in the table below.

We can develop our analysis even further, given that China together with Russia has extended her sphere of influence across nearly all Asia, Africa, and elsewhere. 

This is gold unlikely to be available to western markets.

So far, we have accounted for 115,100 tonnes, or 58% of above-ground stocks. 

They do not include SCO and BRICS sovereign wealth funds other than Russia’s two funds.

The balance of 82,994 tonnes of above-ground gold is split between other central banks (27,668 tonnes), LBMA vaults and Comex warehouses (10,075 tonnes) reducing the unaccounted total to 45,251 tonnes. 

We cannot find any estimate for total gold storage in Switzerland, which would probably leave our unaccounted total at less than 45,000 tonnes.

Apart from gold lost through time, the bulk of this remainder will be held as jewellery in western markets so is inherently illiquid.

Conclusion

This survey of gold ownership is purely indicative, with very little verifiable information available. 

Its objective is to arrive at a rough estimate of liquidity in bullion markets by identifying gold not available to markets.

This is important, given that portfolio exposure to gold in ETFs and vaulted bullion is currently estimated at only 0.5%. 

Portfolio managers are now looking at gold as a possible investment. 

Global portfolios are estimated to total $300 trillion, so at current prices an increase of 1% allocation amounts to nearly 25,000 tonnes.

Clearly, there is insufficient liquidity in bullion markets to satisfy demand even on a minor scale. 

With investment strategists at large US banks forecasting higher prices, should investment managers act on it gold prices would be driven significantly higher, irrespective of economic and credit factors.

It is a process which appears to be only just starting, with potentially spectacular consequences.

________________________________________

[i] Anecdotal evidence is that a significant portion of this bullion is under the control of the PLA