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Now China's talking gold down, maybe wanting to get more cheap

Section: Daily Dispatches

China Cautious on Gold Buying

By Aaron Back
The Wall Street Journal
Monday, March 8, 2010

BEIJING -- China's chief foreign-exchange regulator suggested the country's appetite for further gold purchases may be limited and offered soothing words about China's role as an investor in U.S. Treasurys.

"Gold is not a bad asset, but currently a few factors limit our ability to increase foreign-exchange investment in gold," said Yi Gang, director of China's State Administration of Foreign Exchange. He said gold doesn't offer good long-term returns due to price swings.

China rarely reveals its thinking on its investment of its foreign-exchange reserves, which at $2.4 trillion is the world's largest. The issue of China's gold holdings has been highlighted since the global financial crisis as the dollar's movements have prompted academics and officials outside SAFE to recommend more diversification of China's reserves from U.S. Treasurys.

Mr. Yi, speaking at a news conference during the National People's Congress, the annual legislative session, said that while China's gold reserves, at 1,054 metric tons, are the fifth-largest in the world, the holdings, at current prices, are only a small part of its foreign-exchange reserves. Based on data on holdings at the end of last year, gold represented about 1.6% of China's foreign-exchange reserves at current market prices.

Amid continuing jitters about Beijing's appetite for U.S. debt, Mr. Yi also said that China holding Treasurys can be mutually beneficial for China and the U.S.

China buys and sells U.S. Treasurys on a daily basis and Beijing doesn't want such trading to be politicized, Mr. Yi said. He reiterated that China will be a "responsible investor" in Treasurys.

Mr. Yi said the past 30 years have shown that the return on gold hasn't been great and given China's heft as a gold buyer, any move Beijing makes to purchase the precious metal would "certainly" increase gold prices.

China's gold holdings are widely watched. In April last year, gold prices rallied when China suddenly acknowledged that its gold reserves had risen by 454 metric tons since 2003 to 1,054 tons. Last month gold prices swung briefly again on an inaccurate report on a little-known Web site said that China was in talks to buy gold from the International Monetary Fund.

China is the world's largest producer of gold and the second-largest consumer behind India, based on data from the World Gold Council. Its annual gold output is about 300 tons and it consumes about 400 tons on an annual basis, Mr. Yi said. Private holdings of gold held by Chinese individuals has been estimated at more than 3,000 tons, he said.

Mr. Yi's remarks on gold had little effect on Tuesday spot trading of the precious metal, which was at $1,122.85 an ounce, down 85 cents from the New York close.

"The market is sensitive to what China plans for its reserves. But gold is quiet, and nobody really expects China to announce their plans," says Anderson Cheung, director of precious metals at Mitsui in Hong Kong.

Mr. Yi, who is also a vice governor of the People's Bank of China, also acknowledged for the first time that China is studying whether to inject more capital into China Investment Corp., the country's $300 billion sovereign-wealth fund, but added that Beijing aims to let private investors play a larger role in overseas investment.

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