Gold rises on China purchases

Word that the Chinese have been stealthily stockpiling gold over the last five years sent the price of the yellow metal up on Apr. 23.

China announced that its central bank has raised its gold reserves to 1,054 tonnes from 600 tonnes in 2003, giving the world’s largest gold producer the fifth largest gold holding by country after the U.S., Germany, France and Italy. Both the IMF and the SPDR gold trust ETF have larger holdings with 3,217 tonnes and 1,104 tonnes respectively.

And while the Chinese have upped their gold holding by 75%, it still only represent roughly 1% of its total foreign exchange reserves – which are, thanks to its massive trade surpluses, the largest in the world. By contrast the U.S. has 8,133 tonnes of gold representing 76.5% of its foreign exchange reserve.

The news sent gold up US$9 to US$912 per oz. – its highest levels since the beginning of the month. If goldbugs, however, expected a greater rise it likely didn’t come because while not officially announced, the Chinese gold purchase had for the most part been priced in by the market.

Also buffering a sharper rise in price is the International Monetary Fund’s (IMF) plan to sell some 400 tonnes of gold. At the recent G-20 summit, leaders endorsed the plan which they say can raise some US$12 billion – money which would then be used to help developing nations.

Market watchers have long predicted an increase in Chinese gold holdings, due to the country’s massive holdings in U.S. Treasuries and dollars. Most of the country’s US$2 trillion in foreign exchange reserves are held in U.S. dollars. With many doubting the long term strength of the greenback, diversifying into gold and other real assets would seem prudent.

China currently holds roughly 40% of all outstanding U.S. treasury debt.

In late March the Chinese Central bank proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.