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WSJ....

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.....As of September, India had just 7.4% of its reserves in gold. Indonesia: 3.5%. Malaysia: 1.4%.

And the big kahuna, China? Just 1.5%......

:)......p

• NOVEMBER 10, 2010, 10:23 A.M. ET

If the World Goes Gold...

• By BRETT ARENDS

AFP/Getty Images

Pure 1,000-gram gold bars produced by South Korea's LS-Nikko

Gold briefly broke through $1,400 an ounce onTuesday–and if comments from the head of the World Bank are any guide,maybe investors should keep buying.

Writing in the Financial Times, Robert Zoellick argued the worldneeds a new monetary system to replace the current U.S. dollar standard.And he suggested gold should be part of the mix.

It wasn't quite a call for a return to the gold standard. Mr.Zoellick actually argued for a new reserve system based on a basket ofmajor currencies, including the yen, the euro, the British pound and theyuan. But his inclusion of gold was what really made the news.

To see what this might mean for the gold market, look at the situation today.

Western governments typically hold a lot of their currency reservesas gold bullion. According to recent data from the World Gold Council,the U.S. has 72% of its reserves in gold, Germany 67%, Italy and France66% and the Netherlands 56%. The European Central Bank holds 26% of itsreserves in bullion.

In many cases, these are bullion holdings accumulated back when the world was on the gold standard.

But the western countries are on the way down in the world economy.They account for a smaller and smaller share of world output. Most,including the U.S., are running huge current account deficits.

Now look at the Asian countries that are on the way up.

As of September, India had just 7.4% of its reserves in gold. Indonesia: 3.5%. Malaysia: 1.4%.

And the big kahuna, China? Just 1.5%.

Gold, in many ways, is a ridiculous item. It has no utility. It'sgaudy. There is nothing mystical or magical about it. And despite whatthe gold fanatics will tell you, it is no more "money" than anythingelse.

Its appeal as a currency is very simple, if negative.

It's "none of the above."

It's not dollars, or euro, or yen, or pounds or yuan. Gold is a"currency" that is not under any nation's control, cannot be debased ordevalued. And that makes it an appealing element in foreign exchangereserves.

If the world moves from a reserve system dominated by the dollar toone based on a basket of currencies, including gold, you could expectall the major central banks to take part.

And if the rising Asian powers were to shift even a small amount oftheir reserves into gold, what would that mean? Consider the numbers.

China has total currency reserves of $2.65 trillion. Its 34 milliontroy ounces account for just $47 billion of that. If China wanted totake its bullion holdings to $265 billion, or 10% of total reserves, attoday's prices it would have to buy another 155 million ounces.

To put this in context, the total world gold supply only comes to 129million ounces a year. Mining output is just 85 million ounces.

And if China wanted to take gold to 25% of is reserves–around thelevel held by the ECB, for example–it would need to buy another 440million ounces at today's prices.

That's the equivalent of every ounce of gold dug up by every gold miner in the world for the next five years.

That would dwarf the 262 million ounces held by the U.S. at Fort Knox and other depositories.

Is this going to happen? Obviously not. It's an impossibility. But itshows that even small shifts by Asian central banks will have anenormous effect on the gold market.

Many private investors bet on gold by purchasing bullion, or sharesin a bullion fund like the "GLD" SPDR Gold Trust. There are otherpossibilities. One, recommended here on several occasions, has been tobuy call options on the GLD. A call option, which can be purchasedthrough any broker, is a bet on higher prices.

These let you bet on higher prices without risking too much capital. They also give you leverage.

An illustration: GLD is $136. But $150 call options, good untilJanuary of 2012, cost just $10.60 a share. These will give you the rightto buy shares in GLD for $150 at any point over the next 14 months.(They trade effectively in lots of 100–one option, costing $1,060, willgive you the right to buy 100 shares).

So if gold continues to boom you can cash in. But if it tanks your losses are limited to $10.60 a share.

Note that options trade effectively in lots of 100–one option,costing $1,060, will give you the right to buy 100 shares. Note alsothat the leverage comes at a price. If the GLD doesn't rise above $150in time, you will lose your entire stake. So one should only make smallbets on options. They are not like shares or mutual funds.

Write to Brett Arends at [e-mail]