China's hidden gold purchase policy...China's hidden gold purchase policy
Evidencesuggests that China is continuing to buy gold for its reserves, but isdoing so in a manner designed not to over-disrupt the global goldmarket.
Author: Lawrence Williams
Posted:Monday,07 Sep 2009
LONDON -
Thereseems to be little doubt that China continues to buy gold for itsreserves, but surreptitiously, as it has no desire to move the marketsunduly, and it knows full well that any announcement of a big goldpurchase will likely do just that.
It is not exactly a secret that Chinese government economists andbankers are disturbed about the U.S. Quantitative Easing moves. Theyfeel that this has ultimately to lead to significant inflation and acorresponding big decline in the value of the dollar within the nextfew years and with some $2 trillion in reserves this is not somethingthey are keen to precipitate by announcements of a major gold purchaseprogramme - or even by showing the world that its gold reserves areincreasing.
In an interesting article in the U.K's Daily Telegraph,International Business Editor Ambrose Evans-Pritchard comments on viewsexpressed by Cheng Siwei who he describes as being "until recentlyVice-Chairman of the Communist Party's Standing Committee, and now asort of economic ambassador for China around the world" and thus in agood position to understand the country's policies vis-a-vis goldpurchases and the dollar.
The gist of the comments was that China has fundamentally lostconfidence in the dollar and is looking towards a more significantproportion of gold in its reserves.
But this is easier said than done without causing huge disruption inthe gold market itself and Cheng is quoted thus: "Gold is definitely analternative, but when we buy, the price goes up. We have to do itcarefully so as to not stimulate the market".
This looks as though it means not only is China buying on dips inthe gold price - and there is evidence of strong support from somewhereevery time gold falls to a certain level - but is also concealing itspurchases by not moving the gold into official reserves, but theholding of it by some other government entity so it stays off theofficial books. When China relatively recently announced its big jumpin gold reserves it was apparent the purchases had actually taken placeover about five years and were only moved into the official reservesthis year, and thus only then reported to the IMF. Thus it is likelythat purchases are continuing in the same manner - off the open books.
If all this is correct it does mean that there is little in the wayof downside risk for gold holders with potentially massive supportcoming in at about $930, but perhaps a cessation of this major supportbuying at around current gold price levels which could keep goldrange-bound. But, of course, if and when China announces its nextsignificant rise in its gold reserves this could have a substantialimpact. But on past performance such an announcement may not happenfor a few years - when it may suit China to do so.
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