China urged to avoid open markets when buying gold

Section:

That's the objective of all central banks: avoiding open markets in gold.

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China Needs to Buy Gold in Long-Term, Industry Executive Says

By Chikako Mogi
Reuters
Thursday, December 3, 2009

http://in.reuters.com/article/domesticNews/idINT21418620091203

SHANGHAI -- China has the scope to step up gold purchases but should take a long-term approach, avoiding the open market, a Chinese industry official said on Thursday.

"China needs to buy gold over a longer term, but not in the open market," said Zhang Bingnan, a senior official from the China Gold Association, told Reuters on the sidelines of a gold conference, stressing that this was strictly his personal view.

China said in April its official gold holdings had risen to 1,054 tonnes from 600 tonnes in 2003, by buying on the domestic market and from domestic producers.

China's gold holdings make up just a small portion of its foreign exchange reserves worth $2.27 trillion, the world's largest and mostly held in U.S. Treasury bonds.

Speculation has been rife that China may follow India in buying from the International Monetary Fund in a bid to diversify its official reserves portfolio as the dollar continues to weaken.

"If we adopt a too aggressive and rash manner, it is not practical," Zhang told the conference, reiterating this was strictly his personal view and not representative of the views of the association.

Over the past two decades, central banks have been net sellers of gold, but the turnaround in attitude will likely make them net buyers of gold next year, analysts have said.

Expectations of rising public sector buying, together with the perceived prolonged weakness of the dollar and renewed jitters about financial systems in light of Dubai's debt crisis have put gold in a fresh spotlight as an asset class.

"Clearly, central banks made decisions after looking at alternatives. Their decision (to buy gold) reflects that the risk with gold is acceptable," an industry official, who declined to be named, told Reuters on the sidelines of the conference.

Participants said gold should not be looked as a safe haven, as bullion is a financial product. But its detachment from any form of counterparty risks makes it shine in times of recurring financial crisis stemming from credit risks.

Gold is a safe asset in that there is "no violation of contract," Zhang said. "Gold is the only non-credit product in the financial market," he said, adding that the latest Dubai debt crisis was also a credit crisis, very similar to the subprime mortgage problems and the collapse of Lehman Brothers.

A trend that emerged two years ago and strengthening now is that more people are willing to include gold in their portfolio and once they buy, they will want to hold, said Albert Cheng, managing director, Far East, at the World Gold Coucil.

"Gold is not something that will make you rich overnight. But it will help you sleep well," he told Reuters on the sidelines of the conference. People's desire to hold gold reflects bullion's role as a means to preserve wealth, he said.

With gold underpinned by such investor confidence, few expect prices to retreat any time soon.

"I am long on gold, but sold some calls to raise cash," said William Purpura, an independent gold trader and an official at the asset management firm Great Lakes. With the market renewing a series of new record highs this week, he said he advanced sell stops to $1,191.60 on Thursday from $1,163.00 per ounce.

The price levels are likely to slow supplies of recycled gold in the fourth quarter and dampen jewellery demand, the WGC's Cheng said.

A WGC report last month showed that supplies to the market from recycled gold rose 31 percent to 283 tonnes in the third quarter, but that was down from 314 tonnes in the second quarter and also a drop from 569 tonnes in the first quarter of 2009.

Cheng said those who had bought at much lower price levels may have let out their holdings and have little inventories now, or people expecting prices to rise are hoarding their supplies.

He expected jewellery demand to also come down in the fourth quarter, although Christmas demand needs to be watched closely.

Gold prices rallied to fresh record highs above $1,225 an ounce on Thursday as the dollar slid towards a 16-month low against the euro.

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