Real Wealth #042 05/15/2006
How China's Big Move Could Send Gold Soaring!
There's no question about it — precious metals markets are reeling today, as gold slipped from $33...all the way to $682.
The biggest factor in today's losses was enormous selling of commodities by investment funds.
We've said all along that there could be some wild swings as part of this roaring commodities bull market. And today's movement is nothing more than that — just a wild swing as part of an overall dramatic upward trend.
As a matter of fact, a story that broke just last week could have an enormous impact on the price of gold in the next 12 months...and make today's activity look like nothing more than a blip on the radar.
As usual, the mainstream press buried the story — I guess until gold hits $1,000 an ounce, it's just not "sexy" enough.
Here's what happened:
Local Chinese economists are encouraging their government diversify its holdings — and protect itself against the volatility of the U.S. dollar and other currencies — by radically increasing its gold holdings.
Of course, the Chinese government won't confirm any of this — their banking policies are kept secret.
But here's what we do know: Right now, China owns gold reserves of roughly 600 tons — a figure that has not changed since the end of 2002. Those gold holdings are roughly 1.3 percent of China's foreign exchange reserves.
As the volatility of the U.S. dollar becomes impossible to ignore, many Chinese economists are strongly suggesting that their government begin looking to diversify.
The truth is, China does likely need to diversify...and they need to hedge against global currency uncertainty as a whole.
So what's the answer?
They need to buy gold.
A lot of it.
As I said earlier, currently China has gold reserves of roughly 600 tons...or about 1.3% of its foreign exchange reserves, according to the China Gold News.
But industry analysts and Chinese economists are recommending that china increase its gold position to 5% of its foreign exchange reserves.
Moving from 1.3% to 5% may not sound like much...but let me do the math for you. Such an increase would mean China would increase its gold reserves from 600 tons to 2,500 tons!
So how is China going to suddenly purchase an "extra" 1,900 tons of gold? Here's a hint: they won't be able to load it up in a cart at the local Wal-Mart.
Think about it: Annual gold production worldwide is approximately 2,400 tons. And demand last year alone was measured at 3,700 tons — and it's on the increase!
In other words, in order for China to properly diversify its holdings — according to its own economists — it would need to buy almost an entire year's worth of production!
Obviously, there's no way that can happen. And given the fact that central banks have sold roughly 700 tons per year since 2002...it's unlikely that China can meet its needs by buying existing supply either.
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So will China move ahead and become a huge gold buyer?
No one can say for sure — after all, it is a state secret. But according to last Thursday's edition of The Standard, China's Business Newspaper, "State Administration of Foreign Exchange director Hu Xiaolian said in January the regulator would 'optimize' the structure of its holdings, stoking speculation the country could buy more bullion."
No matter how much gold China ultimately ends up adding to its holdings, you can be sure that the increase in demand will have an impact on the markets.
Again, here's a quote from The Standard... "'If China buys a big amount of gold, it will only push prices to record and trigger complaints from other nations,' said Tan Yaling, a researcher with the state bank."
Here's the bottom line: the weakness of the U.S. dollar has already contributed to soaring gold prices. And these early reports from China are likely a warning sign — there's a strong probability that China will look to diversify away from the dollar and into gold...at least at some level.
And that increase in demand — be it 500 tons, 1000 tons or 2,400 tons — will continue to push prices higher in the months ahead.
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