back to blog homepage

China May Buy More Gold for Reserves

The story below is from today's Bloomberg. It details China's fears that the US bailout will cause interest rates to rise and the dollar to fall. They are likely to start accumulating gold and other commodities now that the prices have fallen to current levels. This will make the shares of commodities and commodity producers more valuable.

What is not said in the article, but I can guarantee you they understand is that since they are the world's largest commodity user/importer, if they buy commodity companies (whether iron ore, aluminum, copper, oil, etc.) they have better control over the availability to them and the scarcity to the rest of the world.

This is a very inflationary event and will make gold more valuable along with whatever commodities China tries to control. There is a lot of talk about how we are now experiencing deflation and that inflation is not a problem. Unfortunately, that thinking is what got us into trouble – all of the actions taken to get us out of the current financial crisis are highly inflationary and once we've turned the corner inflation will be a big issue once again.

Mark

China May Buy More Gold for Reserves

By Theresa Tang and Aaron Pan

Nov. 14 (Bloomberg) — China may buy more gold for its currency reserves on concern the $700 billion U.S. bank bailout will cause declines in the dollar and Treasuries, the Standard newspaper reported, citing an unidentified person familiar with the situation.

The decline in gold prices means it is “the right time'' to increase the gold reserves, Wan Guoli, vice secretary general of the China Gold Association, told the newspaper. The unidentified source said the government is considering building up holdings of the metal in “a big way,'' the newspaper said. China holds the world's biggest foreign-exchange reserves at $1.9 trillion, according to data compiled by Bloomberg.

Gold for immediate delivery was little changed at $733.07 an ounce at 8:21 p.m. in Singapore, after gaining 3.4 percent yesterday. Futures for December delivery were up $26.90, or 3.8 percent, to $731.90 an ounce in after-hours electronic trading on the Comex division of the New York Mercantile Exchange. The dollar was little changed at $1.2764 per euro.

The mainland could increase its gold reserves to as much as 4,000 tons, the Hong Kong newspaper said, citing Tanrich Futures senior vice president Colleen Chow Yin-shan. It said the reserves are 600 tons now.

Chinese authorities are now grappling with how best to manage the reserves, forecast by the International Monetary Fund to reach $2.2 trillion by the end of December and $2.7 trillion by the end of 2009. The yuan remains Asia's best performer against the dollar this year, rising 6.9 percent.

To contact the reporters on this story: Theresa Tang in Hong Kong at ttang3@bloomberg.net; Aaron Pan in Hong Kong at Apan8@bloomberg.net.