China's Appetite For High-Flying Gold To Dominate

Reuters ^ | 12-2-2009 | Chikako Mogi

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China's Appetite For High-Flying Gold To Dominate

Wed Dec 2, 2009 4:30am EST
By Chikako Mogi

SHANGHAI, Dec 2 (Reuters) - Gold's successive run-ups to record highs are underpinned by hopes for central banks to further diversify reserves, particularly China's, a topic set to dominate a two-day industry gathering in Shanghai from Thursday.

News that the central bank of India bought 200 tonnes of gold from the International Monetary Fund, about half of what was on offer, reinforced views that gold has established its status as an investment asset, as well as an alternative currency.

The move also strengthened speculation that other emerging country central banks will follow suit, particularly China, which has the world's largest foreign exchange reserves worth $2.27 trillion, mostly held in U.S. Treasury bonds.

"It's possible for China to buy gold from the IMF in large volumes in pursuit of asset allocation for its foreign reserves, but that will mean further detachment from dollars of which China holds the most. This puts China in a real dilemma," said Xiao Minjie, senior economist at Daiwa Institute of Research in Tokyo.

Perceived dollar weakness in coming years, which has been the other main factor driving up gold prices, is a source of concern for China and others with large investments in dollar assets as the depreciating currency erodes asset values.

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The Nikkei 225 is up 2.28% at present. See here.

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Can Bank of Japan Overcome Deflation?

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China and India buying put a floor under au...so the story goes
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By: Kenneth Gerbino, Kenneth J. Gerbino & Company

Gold Market

The financial crisis is now a year behind us and so far with very little inflation (which won’t last long) it is unusual for gold to be acting so robust. Usually when one sees a stock or a commodity going up when most of the usual reasons for its normal price behavior are absent, it signifies new, powerful and unknown force(s) have entered the marketplace.

There are four new forces that were not present in past cycles: 1&2) Central Bank and Sovereign Wealth Funds buying bullion discreetly and in an orderly fashion. With the recent Indian purchase of 200 tonnes of IMF gold this force is now out in the open. The fact this was not done covertly and undercover is very unusual. It is also very bullish, as it implies that other central banks are going to be doing the same thing. 3) Financial Institutions and money managers who have never invested in gold are buying gold as a small percent of their portfolio as pure monetary insurance. These three buying forces should be long term and steady investors. They will not be price sensitive buyers. They will look at gold for the long term in a way that quarter to quarter performance conscious money managers or traders do not. They will buy gold as insurance against the follies of governments including their own. They are also the deepest of pockets and could easily accumulate as much gold each year as is annually mined or disinvested by traders and scared retail sellers. 4) The last force is a hybrid of the old standby “gold bug” crowd and represents a new retail crowd outside of and distinct from the old line street wise buyer in India and China or hard money person. I call this force the nickel and dime force. It means that all over the world (in a hundred or more countries) small amounts of gold are being bought by people because of the unnerving events of the last 18 months. The buyers of this gold are people from the highest to lowest income tiers. Collectively they could swamp the even the institutions with buying power.

The largest jewelry retail market in the world, India, has significantly reduced gold imports. Taking up the slack is investment demand that is not readily defined. Therefore this slack, in my opinion is coming from the above four areas.