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Beijing may bolster gold reserves further: analysts
It may purchase more on worries of cash pile erosion
(SINGAPORE) The big surprise in China's revelation last Friday that it has secretly added over 450 tonnes of gold to its foreign reserves over the past six years may be the fact that it hasn't bought far more than that.
Now, many analysts say the rare public disclosure may be a prelude to Beijing accelerating its purchases - possibly from big government agencies or central banks - as it worries about the erosion of its US$2 trillion cash pile.
In the first public comment on top-secret gold holdings in years, Hu Xiaolian, head of the State Administration of Foreign Exchange (Safe), told Xinhua news agency that the country's reserves had risen by 454 tonnes from 600 tonnes since 2003. He said the gold had been purchased from domestic production.
The figure confirmed what many gold bugs have suspected for years - that Beijing has been quietly amassing reserves. The surprise is actually how conservative its approach has been.
As a proportion foreign exchange reserves, which have risen five-fold over the same period, gold now stands at a tiny 1.6 per cent, versus 1.7 per cent in 2003, according to Reuters calculations, suggesting Chinese disenchantment with the dollar has yet to significantly influence its buying patterns.
But things may be changing, and a quickening pace of gold buying would lend considerable support to prices that have threatened to stall at around US$900 an ounce - unless, as many analysts expect, it buys the gold through private channels. The IMF has approved selling just over 400 tonnes of its gold.
'Central banks will go straight to China rather than mess about or spook the market. China will be a ready buyer and pay a decent price,' said Jonathan Barratt, managing director of Commodity Broking Services in Sydney.
For years, China has used its trade surplus to buy up US treasury bills - effectively paying for the consumer boom that collapsed last year - but worries about inflation and the slide in the dollar mean Beijing wants to diversify into other assets.
More recently, China suggested a move toward a world currency system linked to the International Monetary Fund's (IMF) special drawing rights, an idea dismissed last month by senior Obama adviser Paul Volcker as not practical.
'In terms of China, there's substantial currency and debt risk with the current holdings of reserves, so this reflects an ongoing pattern of diversification that we've seen across both public and private sector institutional funds,' said Daniel Wills, senior analyst at ETF Securities in London.
Gold prices rose a modest one per cent after the news last Friday, but few dealers expects Beijing to abandon its discreet approach and embark on a buying spree.
The announcement that Beijing was sitting on 1,054 tonnes of gold bullion, up 75 per cent in the past six years, pushed China up to the fifth place in the table of gold-holding nations.
In some regards, the sum is sizeable, about the same amount that Europe's central banks and the IMF sell each year as they gradually and publicly destock.
By other measures the sum is paltry. The SPDR gold trust, the biggest exchange traded fund, saw its holdings rise by the same sum over just six months.
By Reuters calculation, China's holding of gold are worth around US$30.9 billion at current prices, while the US gold mountain is valued at US$238 billion. The United States holds 79 per cent of its foreign currency reserves in gold.
'We recommend our clients hold 5 per cent of their investments in gold. On that basis China has another 3,300 tonnes to buy,' says ANZ's senior commodities analyst Mark Pervan.
And buying more gold would fit well with Beijing's publicly stated aim to build a bigger inventory of all raw materials, which would also reduce its exposure to the greenback. -- Reuters
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