Image Source: The People’s Bank of China (PBoC) is covertly buying very large amounts of gold, adding upward pressure to a tense gold market.An explosive cocktail of and central banks in the East buying gold this year is making the gold price rise sharply. Interest rate cuts and geopolitical strain will sustain this bull market.
U.K. Gold Exports to China Are a Proxy for PBoC Buying
Last July, I published how the Chinese central bank covertly buys gold in the London Bullion Market through bullion banks.All “non-monetary” gold (privately owned metal) in China is traded over the Shanghai Gold Exchange (SGE)1. However, since the war in Ukraine began, there has been more supply in the Chinese market than sold through the SGE; the “surplus” reflects what the PBoC buys.Gold exports from the U.K. are virtually all in the form of 400-ounce bars from the London Bullion Market. The retail market in the U.K. pales in comparison to the wholesale market that deals in “large bars” (400-ounce bars).On the SGE, very few large bars are traded—the Chinese private sector prefers 1 Kg bars. My research shows that direct exports from the U.K. to China are, in fact, purchases by the PBoC. These purchases show up in cross-border trade statistics because the PBoC buys the gold from bullion banks that take care of shipping and insurance and thus have to deal with customs.The above matches other evidence of the PBoC acquiring gold surreptitiously. By now, most gold investors are aware that the massive difference between what the World Gold Council (WGC) estimates central banks purchase in aggregate (based on field research) and what central banks in total report to the IMF is to the central bank of China.
Chart 1. Since mid-2022, actual central bank gold purchases have been dramatically higher than the IMF was willing to report.This secret buying by central banks has exploded since the outbreak of the war in Ukraine early 2022 because, at that point, the West froze Russia’s dollar assets. Next to the PBoC, is known to be buying gold under the radar, albeit in smaller sizes.
More Proof the PBoC Buys Gold in London
Elaborating on the above, the PBoC has made it overtly clear what they did in September: buy 60 tonnes of gold from bullion banks operating in the London Bullion Market.As we saw private gold demand move halfway through 2024, driving the price up, the premium at the SGE took a nose dive into negative territory. But, surprisingly, Chinese customs data from September shows gross gold import accounted for 95 tonnes2.According to the rules in the Chinese gold market, all bullion imports into the domestic markets must be sold through the SGE first. But if the SGE trades at a discount, why would any bank import gold to sell at a loss? Of course, they do not. When the SGE trades at a steep discount, gold imports into the domestic market are not bought by the private sector. <img alt="Chart 2. In green, large imports while private demand on the SGE is weak, indicated by a discount relative to the gold price in London. Imports shown are destined for the PBoC, not the private sector3.” height=”506″ src=”https://www.moneymetals.com/uploads/content/2.-Chinese-Gold-Market-2024–SGE-premiums–import-and-export–.png” width=”810″>Chart 2. In green, large imports while private demand on the SGE is weak, indicated by a discount relative to the gold price in London. Imports shown are destined for the PBoC, not the private sector3.What has happened is that 60 tonnes imported from the U.K. in September2 were swiftly handed over to the PBoC (exempt from rules) when they arrived in Beijing and carried to central bank vaults4.
Chart 3. Direct gold exports from the U.K. to China (PBoC purchases) are correlated to gold additions disclosed by the Chinese central bank. Although, the PBoC usually takes up to a year to publicly report its acquisitions and keeps about 65% of it hidden.
An Explosive Gold Market
So, in September 2024, the PBoC covertly bought at least 60 tonnes in London—it could have bought gold in other places as well. Western investors were also driving up the gold price, as evidenced by and net gold imports into London.
Chart 4. Gold imports to the U.K. rose sharply in 2024 for the first time in several years.Early 2024, I wrote on : “As the gold price will be making new all-time highs, I expect more Western investors to join buying gold, through ETFs and outright, as they will fear currency debasement just as the Chinese central bank. It will be a perfect storm for gold.”This has become a reality as the price of gold is up 30% year-to-date. Meanwhile, the PBoC keeps the “pedal to the metal” (pun intended). In chart 2, we can see that in October, the SGE was trading at a discount while imports reached 95 tonnes, which was the same as in the prior month. I strongly suspect the PBoC was secretly buying gold in London again.Large investors on both hemispheres are buying gold hand over fist. Ongoing wars and fiscal deficits aren’t waning, and the safe haven of choice for institutional money is gold.We are in the midst of a perfect storm for gold that is to continue for years to come until debt levels and the global power distribution have rebalanced. I will provide a computation of how much gold the PBoC truly owns in a forthcoming article. You may be surprised.Notes
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