Gold prices rose modestly on Friday after China said it had become the world’s fifth largest holder of bullion after secretly increasing its reserves by 75 per cent to 1,054 tonnes since 2003.
Goldadded 0.9 per cent at $910.20 a troy ounce, taking its gain over theweek to 4.9 per cent. There was talk that China’s announcement couldprompt a broader reassessment of gold’s role as a reserve asset byother central banks.The move does send a positive signal to the market,re-igniting gold’s relevance as a monetary asset,” said Suki Cooper ofBarclays Capital.
“It has also led to speculation about further increases in China’s gold reserves, buoying positive sentiment towards bullion.”
Chinahas overtaken Switzerland, Japan and the Netherlands to become thefifth largest official holder of gold but still only holds a smallproportion of its total foreign exchange reserves, under 2 per cent, asgold.
Some European central banks hold 50 to 60 per cent oftheir FX reserves as gold but BNP Paribas said it was unlikely Chinawould move to those sorts of levels.
“China will be mindful of the global implications of any meaningful diversification of FX reserves and the central bank will have to tread carefully,” said Michael Widmer of BNP Paribas.“However, higher gold holdings could create an illiquid asset on the central bank’s balance sheet which could prove potentially difficult to liquidate if required.”
MichaelJansen of JPMorgan said the market’s reaction was telling. “If Chinahad bought the gold in the open market instead of from domesticproducers, then investors might be justified in drawing more aggressiveconclusions,” he said. “However, this doesn’t necessarily signal a newattitude towards diversifying the country’s FX reserves because thecentral bank did not have to sell any dollar assets to acquire thesegold holdings.”
The International Monetary Fund has saidit wants to sell 403.3 tonnes of its gold holdings and China’sann-ouncement triggered talk it might try to do a deal with the IMF.Steve Ellis, senior manager of the RAB Capital Gold fund said:“Historically, China was a large gold holder with about 10 per cent ofits FX reserves in gold about 30 years ago. It would struggle to buythat amount in the open market but a deal with the IMF in an off-markettransaction would be incredibly bullish for the market.”