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Written by Geoff Candy  |

May 04, 2012

Jeff Nichols: China’s Secretive Gold Accumulation Designed To Keep Prices Lower

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Managing director of American Precious Metals Advisors says that other countries, too, like Saudi Arabia, also keeping policy of gold accumulation confidential to their own benefit.

[This article appeared on Mineweb.com and is republished here with permission.]

Jeff Nichols, managing director of American Precious Metals Advisors and a senior economic advisor to Rosland Capital, is recognized as one of the world’s top experts in the economics and finance of precious metals. He has been a keynote speaker at dozens of investment and industry conferences, corporate meetings, and private company events around the world. Mineweb’s European editor, Geoff Candy, spoke to Nichols about what he sees as a tug of war in the gold market, the China shadow gold market and why central banks are looking to exchange their euro reserves for gold.

Geoff Candy: Where do you see the gold market placed given the current economic turmoil still in Europe, and indeed, around the world?

Jeff Nichols: I think the gold market in the recent past and probably for the next few months is caught in a tug of war between the physical market and physical off-take, in particular from Asia and by central banks and retail investors on the one hand, and on the other hand institutional traders and speculators … basically the trading desks of the large banks and financial firms that are operating in derivative markets — forwards, futures, options, over-the-counter derivatives — and are typically taking the short side of the market.

So the speculators are reacting mostly to the economic news, particularly from the Federal Reserve and from the eurozone countries, and the physical market is dancing to an entirely different tune. In the short run, we're going to continue to see the financial firms, the speculators and institutional traders keeping a lid on gold, but ultimately in the medium to longer term, it's the physical market that's going to set the price, and there I think the fundamentals are extremely favorable.

Candy: Let's talk a little bit about those fundamentals and particularly the central bank side of things. That’s a major shift in the way in which the market is traded, and we saw some numbers coming out in March that showed strong buying from the developing countries.

Nichols: First and foremost, it's important to understand that the official statistics are probably giving us only a partial view and are not fully accounting for official purchases; that is, central bank purchases over the last several years. Most notably absent from the official data released by the IMF every month are purchases that are probably taking place by the People's Bank of China that are not counted in the statistics, and is quite significant.

Candy: The last time that China reported their reserves was in 2009 and it was a significant jump. Is there any way to gauge how much they really are buying, or a better question is, when they're perhaps likely to admit to what they have been doing, if you will?

Nichols: I think it may be a long time before they ‘fess up to their purchases. I don't think it's in their interests to publicize the fact that they have a policy of gradually accumulating gold reserves over time. The more people recognize and give credence to that view, the more expensive it will be for the People's Bank of China to make those purchases. There may be some other countries that similarly are buying on the sly, surreptitiously if you will, and prefer not to make it public. Because by doing so, it's likely to generate some increase in the price and raise the acquisition costs to those central banks that are continually buying.

But if I had to guess, I'd say that Saudi Arabia and perhaps some of the other oil-rich countries that have significant U.S. dollar reserves already are probably buying from time to time. We did see about a year to a year and a half ago an announcement by the Saudis that they had made a significant purchase in the recent past. My guess is that announcement may actually have been accidental — that they didn't intend to make it public, but it somehow came out and that they continue to buy and are not publicizing it.