Apr 28

China’s Gold Reserve Increase Creates Excitement

Posted by Kristjan Velbri | Posted in Gold | Posted on 28-04-2009

Gold bullionLast Friday China announced that it had been “secretly” buying gold bullion since 2003. China increased it’s gold holding by 454 metric tons to 1,054 metric tons (a metric ton equals 2,204.62 pounds or 32,150.7466 troy ounces).

The recent buying brings China’s /…/  ratio of gold to total reserves to 1.6% from 1.7% in 2003, according to Tom Pawlicki, a precious metals and energy analyst at MF Global. It also places them fifth among countries with the largest gold holdings.(Forbes)

Although the news media played this story like it was groundbreaking, it’s really nothing to lose your mind over. The gold bugs will try hype any minor news story, but the truth of the matter is that during the same period China has been buying a lot more dollar denominated Treasurys than gold. Buying gold is only a part of building a modern financial system, where currency risks are hedged. One way to protect against currency default or a less dramatic, but still, sudden move, is to buy gold. But this news story is nothing to get sucked into. While it is true that gold offers protection against inflation, it certainly doesn’t offer protection against a recession/depression and as witnessed by the latest PPI/CPI data releases, the inflation fears are clearly overstated (for now, at least).

Some experts claim that China’s public announcement of gold purchases is a move into a more transparent financial system. Purportedly, China wants to improve it’s relations with other top financial players and one way to gain trust is to be more open about the buildup of their financial system and government reserves. China is already a major buyer of Treasurys and a move into investment banking doesn’t seem that far off. China’s banks are already the world’s biggest in terms of market cap.

Meanwhile, gold is trending downwards amid fears of deflation. I guess the bear market rally has also eased concerns over the US dollar, but worries over the viability of Obama’s spending might come back to haunt the US dollar. This will most likely push the gold price back up again. The most important thing to take away from this is to follow the trend. Don’t try to anticipate the turning of any trend as you will most certainly burn away your capital in the process.

The bottom line is, if China’s gold reserve increase had any effect on the gold price, it’s influence is long past. Unless, of course, they’re going to buy even more gold off the market. So far they’ve been buying gold from Chinese producers and not from the open market.

If you want to take a ride downwards with gold there are some inverse ETFs on the market. Here are two (I’m sure there are many others):

– DB Gold Double Short ETN (DZZ)
– DB Gold Short ETN (DGZ)

    For anyone who is interested in gold juniors, Jim Puplava from Financial Sense discussed the life cycle of junior mining companies in last week’s show (here is the mp3 link).

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    [...] has been openly promoting gold and silver as an investment and a store of wealth. Not long ago, the Chinese announced that they had been “secretly” buying gold – starting from 2003 they had bought over 600 metric tons of gold, bringing the gold to cash [...]

    [...] I first wrote about the Chinese disclosing their gold purchases back in April, I was pretty sure that any upside potential these purchases might have were long [...]