China Officially Rejects Gold As A Reserve Asset

Tiny Gold Nugget

China’s State Administration of Foreign Exchange (SAFE) affirmed its commitment to U.S. government bonds today, according to Reuters:

“The U.S. Treasury market is the world’s largest government bond market, and U.S. Treasury bonds deliver fair good security, liquidity and market depth with low transaction costs. The U.S. Treasury market is a very important market for China.”

They also rejected gold as an alternative:

“It cannot become a main channel for investing our foreign exchange reserves,” the agency said, noting the size of the gold market was limited and prices were volatile.

It’s ironic how gold’s scarcity hurts its chances as a reserve.

Thing is, even a small additional allocation to gold by China could have a large impact on the gold market. For example, just increasing gold’s share of Chinese reserves by 1-2% could double the amount of gold China holds according to Reuters (from 1,054 tonnes now). So it’s not like gold investors need much of an additional commitment from China in order to feel bullish.

The problem so far has been that China has mostly bought gold off-market, either through the IMF or by acquiring the metal from domestic producers, whose production has been growing rapidly.

The government seems too savvy to simply walk into the open market and buy in volume. Thus if you’re wishing for a large China impact on the gold market, it would probably have to come from private Chinese investors.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.