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ANALYSIS - China's big gold buy barely kept pace with forex

SINGAPORE (Reuters) - The big surprise in China’s revelation on Friday that it had secretly added over 450 tonnes of gold to its foreign reserves over the past six years may be the fact that it hasn’t bought far more than that.

Graphic showing Top ten holders of physical gold. Reuters graphic/Catherine Trevethan

Now, many analysts say the rare public disclosure may be a prelude to Beijing accelerating its purchases -- possibly from big government agencies or central banks -- as it worries about the erosion of its $2 trillion cash pile.

In the first public comment on top-secret gold holdings in years, Hu Xiaolian, head of the State Administration of Foreign Exchange (SAFE), told Xinhua news agency that the country’s reserves had risen by 454 tonnes from 600 tonnes since 2003. She said the gold had been purchased from domestic production.

The figure confirmed what many gold bugs have suspected for years -- that Beijing has been quietly amassing reserves. The surprise is actually how conservative its approach has been.

As a proportion of foreign exchange reserves, which have risen five-fold over the same period, gold now stands at a tiny 1.6 percent, versus 1.7 percent in 2003, according to Reuters calculations, suggesting Chinese disenchantment with the dollar has yet to significantly influence its buying patterns.

But things may be changing, and a quickening pace of gold buying would lend considerable support to prices that have threatened to stall at around $900 an ounce -- unless, as many

analysts expect, it buys the gold through private channels. The IMF has approved selling just over 400 tonnes of its gold.

“Central banks will go straight to China rather than mess about or spook the market. China will be a ready buyer and pay a decent price,” said Jonathan Barratt, Managing Director of Commodity Broking Services in Sydney.

For years China has used its trade surplus to buy up U.S. treasury bills -- effectively paying for the consumer boom that collapsed last year -- but worries about inflation and the slide

in the dollar mean Beijing wants to diversify into other assets.

More recently, China suggested a move toward a world currency system linked to the International Monetary Fund’s Special Drawing Rights, an idea dismissed last month by senior Obama adviser Paul Volcker not practical.

“In terms of China, there’s substantial currency and debt risk with the current holdings of reserves, so this reflects an ongoing pattern of diversification that we’ve seen across both

public and private sector institutional funds,” said Daniel Wills, senior analyst at ETF Securities in London.

Gold prices rose a modest 1 percent after the news on Friday, but few dealers expect Beijing to abandon its discreet approach and embark on a buying spree.


The announcement that Beijing was sitting on 1,054 tonnes of gold bullion, up 75 percent in the past six years, pushed China up to the fifth place in the table of gold-holding nations.

In some regards, the sum is sizeable, about the same amount that Europe’s central banks and the International Monetary Fund sell each year as they gradually and publicly destock.

By other measures the sum is paltry. The SPDR gold trust, the biggest exchange traded fund, saw its holdings rise by the same sum over just six months.

By Reuters calculation, China’s holdings of gold are worth around $30.9 billion at current prices, while the U.S. gold mountain is valued at $238 billion. The United States holds 79 percent of its foreign currency reserves in gold.

“We recommend our clients hold 5 percent of their investments in gold. On that basis China has another 3,300 tonnes to buy,” says ANZ’s senior commodities analyst Mark Pervan.

And buying more gold would fit well with Beijing’s publicly stated aim to build a bigger inventory of all raw materials, which would also reduce its exposure to the greenback.

“I see this as very supportive for sentiment towards gold -- I suspect that the Chinese will seek further opportunities to rebalance their gold holdings, in line with other central banks,”

said Nick Moore, global head of commodity strategy at RBS Global Banking and Markets in London.

“The nirvana would be that they go up to 10 percent but that can’t happen as there isn’t enough gold available.”

Additional reporting by Veronica Brown