China’s Gold Stockpile Nudges Price Upward

Word that the Chinese have stealthily stockpiled gold over the last five years sent the price of the yellow metal up for the week ending April 24.

Unfortunately for short-term gold investors, however, those gains weren’t sustained in the new week as the big players decided to take profits, sending the gold price back south.

The initial rally came after China announced that its central bank 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 International Monetary Fund (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 represents roughly 1% of the country’s 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 April. If gold bugs expected a greater rise, it likely didn’t come because the market had, for the most part, already priced in the Chinese gold purchase, even though it hadn’t been officially announced.

Also buffering a sharper rise in price is the IMF’s plan to sell some 400 tonnes of gold. Leaders at the recent G20 summit endorsed the plan, saying it could raise some US$12 billion — money that 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 U. S. dollar as the international reserve currency with a new global system controlled by the IMF.

While some pundits argued that the latest retracement in the gold price was caused by the swine flu threat coming out of Mexico, the price merely retraced its recent losses. Such weaker prices have come in an environment of falling jewelry demand, rising scrap inventories and increasing confidence that the global economy has avoided depression without stoking short-term inflation.