After quietly doubling reserves, China is wary of gold 'bubble'


By Ambrose Evans-Pritchard
The Telegraph, London
Wednesday, December 2, 2009

The Chinese authorities have given the clearest indication to date that they view the surge in gold to an all-time high of $1,217 (L730) an ounce as a speculative frenzy.

Hu Xiaolian, the vice-governor of the central bank, said Beijing would not buy gold indiscriminately.

"We must keep in mind the long-term effects when considering what to use as our reserves," she said. "We must watch out for bubbles forming on certain assets and be careful in those areas."

China announced this year that it had quietly doubled its gold reserves to 1,054 tonnes, the world's fifth largest holding. India has also joined the rush, gobbling up half the IMF's gold sale.

News that the rising powers of Asia are shifting a chunk of their fast-growing reserves into gold in a flight from Western paper currencies has emboldened investors to take out large gold bets on the futures markets or through exchange-traded funds (EFT), leading to the parabolic rise in price over recent weeks.

However, officials in Beijing are aware that China's $2.3 trillion reserves are now so enormous that the central bank cannot buy much gold without distorting the price, so they have adopted a de-facto policy of buying in a calibrated fashion each time prices fall back to their rising trend line -- "buying the dips" in trading parlance. Experts say that China is putting a floor under the gold price but does not chase rallies once they are under way.

There is also a double-edged twist to news that Barrick Gold, the world's biggest gold mining company, has closed the final 3m ounces of its notorious hedge book ahead of schedule. While the move is a bet that prices will continue to rise, it also means that Barrick has been a big buyer of gold lately. These purchases have now stopped. One of the key drivers behind the spike this autumn has been removed.

BNP Paribas said yesterday that the current rally may have another two months or so to run, advising clients to stay invested as a form of "financial calamity" insurance.

The "quasi-sovereign" default by Dubai serves as a powerful backdrop to gold fever, reminding funds that many countries, starting with Greece, Latvia, Ukraine, Bulgaria, and Vietnam, are also on thin ice and may face debt difficulties over the next year.

Ken Rogoff, the IMF's former chief economist and author of a history of defaults, told Jeff Randall on Sky News that so many countries are in trouble that it is hard to know where the crisis could hit next. Once one sovereign state veers into default, clusters of others usually follow.

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