25 April 2009

China's buying gold, so should you...

SHANGHAI and BEIJING -- China revealed on Friday that it had secretly raised its gold reserves by three-quarters since 2003, increasing its holdings to 1,054 tons and confirming years of speculation it had been buying.

Hu Xiaolian, head of the State Administration of Foreign Exchange (SAFE), told Xinhua news agency in an interview that the country's reserves had risen by 454 tons from 600 tons since 2003, when China last adjusted its state gold reserves figure.

The confirmation of its surreptitious stockpiling is likely to fuel market talk about Beijing's ability to buy secretly and its ambitions for spending its nearly $2 trillion pile of savings. And not just in gold: copper and other metals markets are booming thanks to China's barely-visible hand.

Speculation has gathered speed over the last year, since the tumbling dollar has threatened to weaken China's buying power -- and give it yet more reason to diversify into gold, oil and metals.

Gold prices jumped on the news of Chinese buying and were up more than 1 percent on the day at $912.05 an ounce at 0715 GMT. By a Reuters calculation, China's holding of gold would be worth around $30.9 billion at current prices.

That accounts for only about 1.6 percent of China's total foreign exchange holdings and is little more than one-tenth of the value of the U.S. gold reserve, the world's biggest. It also means gold has slipped as a share of China's total reserves from about 2 percent, based on end-2003 prices.

Only six countries hold more than 1,000 tons, and China is ranked fifth, having leap-frogged Switzerland, Japan, and the Netherlands with its announcement.

However, the International Monetary Fund and the SPDR Gold Trust exchange traded fund are even bigger, leaving China with the world's seventh-biggest pot of gold.

Several gold market participants said they thought China had bought on the international market, helping to absorb hundreds of tons sold off by central banks and the International Monetary Fund in recent years.

"China has been buying via government channels from South Africa, Russia, and South America," said Ellison Chu, director of precious metals at Standard Bank in Hong Kong.

But Hu said the increase in China's stocks was achieved by buying on the domestic market and from domestic producers.

China is the world's largest gold producer and does not permit exports of gold ingots, only jewelry, leaving plentiful supplies for the domestic market.

China produced 282 tons of gold last year, meaning the state bought around one quarter of domestic production, assuming 454 tons increase in state purchases were spread out over the six years since China last reported a change in its holdings.

Despite the rumors, buying by the state was partially obscured by soaring demand for gold as an investment, especially after the bursting of the Shanghai stock market bubble last year.

Investment demand in China rose to 68.9 tons from 25.6 tons in 2007. But that was still less than one third of retail demand in India, where total bullion consumption topped 660 tons last year.

Hu said China recently reported the change in its gold holdings to the International Monetary Fund and would include the latest change in central bank reports and balance of payment statistics.

She did not say when China notified the IMF.

Although gold rose after Hu's comments were published, the price move was not a huge one for the highly liquid market. Prices had jumped by $13 in the space of an hour on Thursday.

Gold market participants said the news signaled likely further buying by China.

"The comments indicate that China will buy more gold as reserve to improve its foreign reserve portfolio. This is a trend," said Yao Haiqiao, president of Longgold Asset Management.

Hou Huimin, vice general secretary of the China Gold Association, said China should build its reserves to 5,000 tons.

"It's not a matter of a few hundred, or 1,000 tons. China should hold more because of its new international status, and because of the financial crisis," he said.

"The financial crisis means the U.S. dollar value is changing fast, and it may retreat from being the international reserve currency. If that happens, whoever holds gold will be at an advantage."

The European Central Bank recommends its member banks hold 15 percent of their reserves in gold, but among Asian nations the percentage is far smaller, said Albert Cheng, World Gold Council managing director for the far east.

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