Buying Gold For Peace Of Mind

China is trying to increase its gold reserves, according to financial analysts, including the 21st Century Business Herald. China is now the No. 1 consumer of gold in the world after surpassing India.

Even so, economic observers say there are limits to China’s ability to increase gold holdings on a large scale within a short time, so the gains in government reserves will be slow.

China has 11,064 metric tons of gold, accounting for 1.6 percent of its foreign exchange reserves, according to The Economic Times.

Gold has soared 22 percent this year, reaching a record $1,424 an ounce on Dec. 6. as a weakening dollar and concern about the global economy and its recovery has spurred demand for a store of value.

China should purchase gold and oil overseas with its foreign-exchange reserves to avoid losses from a weakening dollar, according to Shao Fenggao, an official at China Construction Bank Corp.

“People have always been speculating about China’s gold reserves, but I think there is not much point in second-guessing whether the government is going to buy gold,” says Roland Wang, general manager for greater China at the World Gold Council. “They have access to information and they must have a plan with regard to gold.”

China remains the biggest foreign holder of U.S. Treasuries, after its holdings rose by $15.1 billion, to $883.5 billion in September, from $868.4 billion in August, according to the Treasury’s statistics.

Holdings Below U.S.

China’s gold holdings are far lower than the 8,133 tons held by the U.S. government, and are only higher than 25 of the 110 countries tracked by the International Monetary Fund, according to the 21st Century Business Herald.

Meng Qingfa, a researcher at the China Chamber of International Commerce, told the International Business Daily that China should increase its gold holdings.

China’s gold market may double in the next decade as retail investment and jewelry demand increase, the council’s Wang says.

Demand may gain to 800 tons to 900 tons in the next 10 years, Wang asserts. China’s jewelry and investment gold demand was 428 tons in 2009, according to the council.

Largest Gold Consumer

India is no longer the largest consumer of gold in the world. In 2009, China bought more gold than India, making it the world’s top consumer. In fact, China edged out Africa in 2007, as the world’s largest gold producer.

Ramping up production to take advantage of record prices is understandable, but why have the Chinese suddenly fallen in love with gold? And, does this affect the price the United States pays?

China is buying gold for the same reason we buy life insurance policies – peace of mind. The Chinese government has reserve of over $2 trillion, mostly greenbacks. Unfortunately, Beijing is not fond of this currency right now. It believes the dollar will go even lower.

As a result, China wants to stock up on something whose value does not change with one country’s policy moves. And that means gold!

Since 2003, Beijing's strategy was to buy most of the gold excavated and refined locally. No one in the international market became the wiser and the bill was paid in yuans.

Today, China has more than 1,000 tons in its official vaults, up a whopping 75% in six years. Its gold reserves are now the fifth-largest among national central banks after the United States, Germany, France, and Italy.

From Our View

WMB believes China is buying gold because it is nervous about the U.S. dollar, and this fear is contagious. Investors in India and round the world have started accumulating gold, too.

The subsequent price spike, fraught with risk, then becomes a self-fulfilling prophecy. Analysts estimate the large increase in gold price stems, in large part, from China’s demand.

Ultimately, China’s real power comes from its hard-headed attitude.

Chinese families may have just figured the virtues of gold as a safe haven, while we have passed it down generations to survive war, unemployment debt, crop failure and marital break-up. But we hate selling gold.

For the Chinese, sentiment doesn’t come into it, at least for now. And, they are more market savvy.

This post is by TechMan, WMB co-author who blogs about trends, issues and ideas affecting business, industry, technology and consumers. If you like this post, please share it!