Trade Strategy? : Taiwan Goes on Shopping Spree in Gold Market

Sometime last year, the Taiwanese started buying gold. And they’re buying more gold, quietly, often in the form of pure bars weighing more than 400 ounces apiece. This year alone, they have bought a virtual mountain of gold--186 tons--compared to less than a single ton during the first few months of last year.

“What does all this mean?”asked Jeffrey A. Nichols, president of American Precious Metals Advisors, a New York investment advisory firm. “It means that since last year Taiwan has become a major sponge for gold, literally absorbing more gold than is available.”

It may suggest something more. While Taiwan’s full motives remain something of a mystery, it could mean the Taiwanese are attempting to mask an embarrassingly large trade surplus with the United States by shipping gold through American ports, according to gold analysts and U.S. officials.

“We’ve told them that if they were going to try to paper over the trade deficit with gold, it wasn’t going to fool us,” said Gary Holmes, a spokesman for U.S. Trade Representative Clayton K. Yeutter.

The question came up this week with the release of the U.S. trade deficit report for March. It showed that $600 million of America’s export gains came in the form of gold shipped to Taiwan. Moreover, those shipments helped slash the U.S. trade gap with cash-rich Taiwan to $531.8 million. In the previous month, the gap was gauged at $1.34 billion--bigger, for example, than the U.S. trade deficit with West Germany and France combined.

It’s not certain that the Taiwanese are fooling anybody at all, if indeed they are even trying to. Last month, Chang Chi-cheng, an official with Taiwan’s central bank, told reporters that the country’s gold purchases “will help reduce our trade surplus.”

The extraordinary rush to gold may be part of a national strategy to reduce the nation’s dependence on U.S. dollars, which have lost 41% of their value relative to Taiwan’s own currency since September, 1985, according to Taiwanese officials. The export-oriented nation has built up foreign cash reserves of $75 billion, mostly in American currency, and analysts said the gold would diversify the nation’s holdings.

The mystery of the gold purchases is heightened by the fact that they are conducted quietly, according to analysts, with the aid of major dealers in New York and possibly other cities.

“It’s not something they advertise,” explained Bernard C. Savaiko, a precious metals analyst with the Paine Webber brokerage firm. “They want to buy it as cheaply as possible, so they keep it as secret as possible.”

Thus far, the purchases have not caused the price of gold, which has hovered in the range of $430 to $460 an ounce in recent months, to spiral upward, although some traders believe that the purchasers have kept it from falling. But some wonder if that may change in the future. Taiwan’s Parliament recently repealed the 5% sales tax charged on private gold purchases, effective this July.

As a result, some analysts are now wondering if there will be a clamor to buy gold this summer: “After July 1, the Taiwanese are going to blow the top of this market even further,” predicted Bruce Kaplan, senior vice president of A-Mark Precious Metals Inc., a major gold wholesaler in Los Angeles.

In addition, growing fears of inflation could force up gold prices. So far, however, this possibility has been offset by the view that the Federal Reserve will crush any resurgent inflation with interest rate hikes.

For all the attention its gold-buying has received, Taiwan is far from the biggest player in the world precious metals market.

According to figures supplied by the International Monetary Fund, for example, the United States is by far the world’s largest holder of gold, with some 260 million ounces. Japan owns about 25 million ounces of the precious metal, and Taiwan’s total holdings barely exceed 11 million ounces.

Yet Taiwan’s extraordinary buying spree may make it the world’s top purchaser, at least temporarily, according to analysts. The political tinge to the recent Taiwanese purchases reminded some of a similar situation involving Japan in 1986, when that nation was preparing to issue a gold coin in honor of Emperor Hirohito.

While purchasing gold from markets throughout the world, Japan routed much of it through the United States. It shipped most of the precious metal out in a single month, however, giving the impression of a sudden reduction in America’s trade gap with Japan.

Said Nichols: “Gold market participants around the world do not appreciate the significance of Far Eastern demand--not just from Taiwan but from Japan, Singapore, Hong Kong and (South) Korea.”