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Tuesday, December 27, 2005

China's Gold Reserve

"Some economists have been appealing to the State Administration of Foreign Exchange to expand China's gold reserve after the Renminbi appreciation in a bid to reduce the country's reliance on the greenback." reports Chen Feng in an article titled China faces dilemma on expanding gold reserve, published on the Official Chinese Government Portal. (gov.cn)

Chen Feng reports, Teng Tai, an economist of China Galaxy Securities Company said "China should increase its gold reserve from 600 tons to about 2,500 tons in a short term and to 3,000 tons in a long term to cope with the versatile exchange rate risks... Too little gold reserve would pose threat not only to China, but also to the global monetary system."

Chen Feng points out china's gold reserve was reported at 600 tonnes at the end of June 2005. Which is only about 1.4 percent of China's total foreign exchange reserve, based on figures from the International Monetary Fund (IMF).

Many countries and organizations have gold reserves of more than 1,000 tonnes, including the United States, Germany, France, Italy, Switzerland and the IMF. See World Gold Holdings report at the World Gold Council.

The current global gold supply is 2500 tonnes per year. If China was to buy 1900 tonnes of gold in the short term, this would drive the price of gold much higher.

If China's gold reserves were to increase to 2,500 tons, it would make China the world's fifth-biggest holder of gold, behind the U.S., Germany, the International Monetary Fund and France. It is now the 10th- largest holder, according to the World Gold Council.

Even a modest increase in its gold holdings, for example to 5 percent of the value of its total reserves, would translate to extra bullion demand of 2,340 tons, or 67 percent of annual global consumption, Bloomberg.com reports Credit Suisse analyst Michael Slifirski said.

This announcement comes after the Russian Central Bank said it would double its gold reserves from 5% to 10%. See Russian Central Bank Gold Reserves to Double.

However, this announcement to increase the Chinese gold reserve by 1900 tonnes is nearly four times as big as Russia saying it will accumulate 500 tonnes.

Bill Murphy of Lemetropolecafe.com had this to say regarding the comments on gov.cn about China's gold reserves.

"Veteran Café members will also remember my relaying to you from South Africa, on my visits there in 2001, that the Chinese were scouring that country to secure gold supply.

One thing for sure, the Chinese are not going to make smoke like this without ALREADY securing a fair amount of supply through intermediaries. There is no way the Chinese could buy anywhere near that amount of gold without sending the gold price bonkers. The market is already in a 1500+ tonne supply/demand deficit per year. The tiny gold market cannot handle anything close to what is discussed in the article … not remotely close at prices below $600 an ounce.

Whatever has been done as far as Chinese gold buying is concerned, or is still to come (which should be considerable), all this central bank talk of gold buying has to have The Gold Cartel freaked out. The way the GATA camp sees it, they are short more than 10,000 tonnes and cannot get it back without driving the price sharply higher. What we have here is set up for a gold buying panic in the near future and for our long-awaited gold derivatives neutron bomb to go off."

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