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In a further sign that China is preparing to make the “renminbi” the world's new “reserve currency”, China announced today that it had increased its gold reserves by 76% - since it last reported its reserves (in December 2002). That increase brings China's official gold reserves to 1,054 tons – placing it 5^th in world rankings.

The U.S. claims to have the world's largest gold reserves, supposedly in excess of 8,000 tons. However, the United States has not allowed any independent audit of its “reserves” in more than 50 years – well before the U.S. defaulted on its international gold-debts. Most commentators believe the U.S. only holds a small fraction of what it claims to have (see “GATA seeks audit of MYTHICAL Fort Knox gold”).

There are many interesting aspects to this news. Let's start with the fact that this HUGE increase in China's gold reserves has been accomplished without any “official purchases” of gold. It is the IMF which keeps record of international gold reserves (based on a voluntary reporting system).

The IMF records any/all national purchases of bullion in world markets. Yet China has been able to boost its reserves by 76%, without making a single purchase of gold in the global, bullion market. Even looking back to December 2002, when China reported an increase of 100 tons in its gold reserves, this increase was also accomplished without any purchases in global bullion markets. (To look at these statistics, yourself, visit the World Gold Council web site.)

The obvious question is where is China getting all its gold? The answer is equally obvious: it is producing all this gold, itself. The other big news in gold markets over the last several years is that China has surged past several nations to become the world's largest producer of gold.

What makes this statistic so remarkable is that China has been able to dramatically increase its gold production, while all the other major gold-producers are reporting production which is either “flat” or declining. I have speculated previously that the Chinese government was buying-up most (or all) of this gold production, and China's latest statement confirms this.

Why has China found it necessary to increase its gold holdings entirely through buying-up domestic supply? Again the answer is very simple: this is the only way that China could significantly increase its gold reserves without driving the price of gold “sky-high”.

If China had been forced to purchase these additional hundreds of tons in the “open” market, the price of gold would clearly be higher by several, hundred dollars an ounce. This latest news also provides context for the recent “suggestion” by the Chinese government that the IMF should sell all its gold.

Such a sale would provide China with the ONLY opportunity to dramatically increase its gold reserves through an official purchase. The fact that China hungers for this additional gold, while already having exclusive access to the world's largest supply-source should signal to both “gold bugs” and non-believers of gold how much importance China is placing in “backing up” its own currency with large, gold reserves.

This is also an indication that China views the current (manipulated) price of gold as being well below its real, "fair market" price. Purchasing such large quantities of gold at record (or near-record) prices clearly implies this.

Such a position should cause considerable fear among the “gold bears”. However, the reason that these people are “bears” about gold, in the first place, is because they don't understand the gold market - so I wouldn't expect a change in attitude from people who clearly lack understanding of these fundamentals.

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