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Gold price fall triggered by disappointing Chinese announcement

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Joe Foster, Gold Strategist at Van Eck Global reports that the gold price has declined on the back of a Chinese announcement of its gold reserves.

Foster writes: “The gold market was met with selling pressure following the July 
17 release by the People’s Bank of China (PBOC) of its official gold holdings. The PBOC announced a 57 per cent increase in gold reserves since its last announcement in 2009.”

Van Eck reports that China now holds 1,658 tonnes of gold in its foreign currency reserve, which is sixth highest globally behind the US, Germany, the International Monetary Fund, Italy, and France. 

“This confirms suspicion surrounding China’s official gold purchases and the PBOC remarked that gold is a unique asset and recognised that gold has always been a key part of reserve management and diversification” the firm writes. 

“The market, however, was disappointed because many analysts had expected to see much higher gold holdings. There have been estimates based on gold flows through Hong Kong and domestic production that suggest that since 2009 there has been a significant amount of gold in China, perhaps over 2,000 tonnes, that is unaccounted for.”

Foster says that it now appears that not all of this purported surplus has gone into the PBOC vaults. “There are pockets of the gold market that are opaque to market observers, and we can assume that more Chinese gold than previously thought has gone to individuals, institutions, or  other government entities as jewellery, bars, and coins, or for use as collateral.”

Gold represents 1.65 per cent of China’s forex reserves, which is a slight increase from 1.5 per cent in 2009. “We had thought China might be targeting gold reserves in the double-digit range like many of its Western counterparts. However, this announcement suggests the PBOC is content to maintain gold reserves at a percentage that is comparable to its Asian neighbours.”

Gold experienced heavy redemptions in the bullion ETPs beginning on July 17 that continued to month-end. Also weighing on gold was weakness in the overall commodities complex  brought on by the collapse of the Chinese stock market, as West Texas Intermediate (WTI) crude fell 20.8 per cent and copper declined 9.3 per cent in July, Van Eck writes.

“On July 20, gold fell through the technically important USD1,100 per ounce level and reached a new cycle low of USD1,072 per ounce. In the midst of summer seasonal weakness, there hasn’t been much anecdotal evidence of a demand response to the new lows from India or China. Gold finished the month at USD1,095.82 per ounce for a loss of USD76.60 (6.5 per cent).”

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