Attention Gold Bugs: China May Be Done Buying

Talk to any gold bug and you will likely hear a host of reasons why you should forget about buying stocks and bonds and instead focus your portfolio on the yellow metal. The bullish arguments amongst the guns-and-canned-goods crowd are many and include the declining value of the dollar, growing geopolitical unrest, inflation expectations, and diversification of currency holdings by central governments around the globe.

One of the biggest arguments made in favor of gold is the expectations for the ongoing fall in the U.S. dollar. Gold bugs argue that owning gold represents a better store of value given the combination of the dollar’s demise and the potential for rising inflation in the future.

Another major spoke in the bull camps’ argument is the idea that many foreign central banks are beginning to diversify their foreign currency holdings away from the dollar (and into some gold). However, those counting on China to lead the charge in this area may soon be disappointed.

The WSJ reports that China's chief foreign-exchange regulator is hinting that the country's plans for further gold purchases may be limited and instead of touting the benefits of gold, offered upbeat comments about China's role as an investor in U.S. bonds.

Gang Yi, director of China's State Administration of Foreign Exchange told the Journal, "Gold is not a bad asset, but currently a few factors limit our ability to increase foreign-exchange investment in gold," In short, Mr. Yi said gold doesn't offer a good long-term solution to currency diversification because of the huge price swings.

At 1,054 metric tons, China’s gold reserves are the fifth largest in the world. However, the value of China’s holdings in gold pale in comparison to the $2.4 trillion the country has in foreign currency reserves. Something that has kept the gold bugs chomping at the bit on the idea of China diversifying away from the dollar and into gold.

Not known for being open about their investment strategies, gold bugs have been energized by reports showing that China had suddenly doubled their gold reserves. In April of last year, gold prices spiked higher on word that Chinese reserves had grown from 454 metric tons to 1,054 metric tons since 2003.

It is also important to note that China is the world’s largest producer of gold and the second-largest consumer of gold behind India.

In short, the market will likely continue to be sensitive to China’s plans regarding the yellow metal. But the idea that China will continue to double its holdings in Gold due to a desire to diversify away from the dollar may be a bit of a stretch.

 

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