About two weeks ago, I was flooded with inquiries concerning an announcement by China that they were banning imports of gold. This came as a shock to many.

China has systematically more than tripled its gold reserves in the last 10 years. The official figures show that China increased gold reserves from about 600 tons to about 2,000 tons. However, there is good reason to believe these figures are understated and that China’s actual gold reserves are significantly higher.

The 2,000-ton figure only represents official reserves. Chinese citizens hold much more privately. Chinese mines produce about 500 tons of gold per year, but China needs much more than that to satisfy government and private demand. This is where gold imports fill the void.

China has been importing over 1,500 tons of gold each year in recent years to meet demand. At the current price of about $1,500 per ounce, these gold imports would use up about $80 billion per year of hard currency reserves.

What readers wanted to know was whether the gold import ban represented a sudden halt in China’s interest in gold. If true, that could have negative implications for the world gold price.

My analysis was that the announcement had nothing to do with gold and everything to do with capital controls and trying to preserve China’s depleting reserves of hard currency. China’s reserves dropped over $1 trillion in 2016 due to capital flight. Excluding precautionary reserves to bail out its banks and certain illiquid assets, China has only about $1 trillion left to defend its currency and pay for imports.

China is suffering a dollar shortage today both because of capital flight and because its trade surplus is drying up due to Trump’s tariffs and the trade war. Banning gold imports was a way to hang onto dollars. Yet as this article reveals, the demand for gold in China was too strong to cut off completely.

Limited permits have now been granted to begin importing some gold, but in smaller quantities than in the past. China is between a rock and a hard place. On the one hand, it wants to preserve its dollar reserves. On the other hand, the demand for physical gold in China is too strong to cut off completely.

The irony is that a lot of the gold that comes into China via the front door soon leaves through the back door via illegal smuggling and other forms of capital flight. In the end, China loses the dollars and the gold.

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