Why
China wants to buy $93 billion worth of gold March 01, 2009
Commodity
Online
BEIJING: Chinese investors beware! Don’t get trapped
in the glitter of gold. In China, investors have been rushing
to gold following the crash of global markets.
But, the investment in gold is also riddled
with risk and this is a critical time now where investors
should be cautious with their gold investment.
According to analysts, gold can be a very
good product for holding its value. But the risks for paper
gold and gold futures are nearly 10 times bigger than real
gold investment. Buying gold related stocks can also be a
risky move.
"Gold is a very solid asset. Buying physical
gold does have advantages compared with other investments.
Investments in gold-backed financial products and paper gold
should be left up to the professionals," says Mark Robinson,
a bullion analyst based in Dubai.
According to Robinson, gold investment in
China is starting to look like a crowded marketplace. It’s
being boosted by the rising prices and market demand. And
the unpleasant performance of the US stock market, low expectations
for the US dollar, as well as investors’ concerns over
the banking crisis have also pushed up people’s need
for gold.
Over the past 5 years, when gold investment
was booming, more problems tended to appear in the market.
Many investors have been hit really hard because they couldn’t
contain themselves, and continued to pour more money into
it.
Meanwhile, China has nearly $2 trillion in
surplus reserves. Beijing’s piggy bank is overflowing
with money. In fact, at nearly $2 trillion, China has the
largest foreign reserves of any country in the history of
the planet.
Whereas Washington now has nearly $11.4 trillion
in debts, not counting the contingent liabilities of the real
estate crisis.
With this case scenario, China’s currency
yuan should have more purchasing power. But that’s not
the case — the dollar remains stronger.
But, over the next few years China is essentially
going to corner the world’s gold market.
Beijing knows that the dollar’s status
as a reserve currency is soon going to be history. Just like
the pound sterling lost its status as the world’s reserve
currency in the early 20th century.
And authorities in Beijing also believe that
as China rapidly progresses toward superpower economic status,
the yuan should be a world-class, stable medium of exchange.
They envision the yuan as a major international
currency some day, with as much (or more) status than the
US dollar. That’s why they’re going to back the
yuan with gold.
Plus, there’s another reason for Beijing
to buy more gold as part of China’s piggy bank. China
has an estimated $1.3 trillion invested in dollar-denominated
investments. They can’t get out of the dollar quickly.
It would destroy the US economy which would have a direct
negative impact on China.
So the smart thing to do: Hedge and diversify
existing dollar holdings with gold. China has a mere 0.9%
of its reserves in gold (600 tonnes) now. That’s the
lowest of any industrialised economy. The US has 77.3% of
its foreign reserves in gold.
Just to up its reserves to 5% in gold, Beijing
would have to purchase $93 billion worth of bullion. That
could easily send the yellow metal skyrocketing to more than
$2,000 an ounce.