December 2, 2009 / 9:31 AM / 10 years ago

PREVIEW-China's appetite for high-flying gold to dominate

* Safe-haven appeal overrides investor caution on gold rise

* Expectations for more central bank buying keep support firm

* Weak dollar puts China in quandary over beefing up gold buy

* China’s physical demand and consumption seen rising

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By Chikako Mogi

SHANGHAI, Dec 2 (Reuters) - Gold’s successive run-ups to record highs are underpinned by hopes for central banks to further diversify reserves, particularly China’s, a topic set to dominate a two-day industry gathering in Shanghai from Thursday.

News that the central bank of India bought 200 tonnes of gold from the International Monetary Fund, about half of what was on offer, reinforced views that gold has established its status as an investment asset, as well as an alternative currency.

The move also strengthened speculation that other emerging country central banks will follow suit, particularly China, which has the world’s largest foreign exchange reserves worth $2.27 trillion, mostly held in U.S. Treasury bonds.

“It’s possible for China to buy gold from the IMF in large volumes in pursuit of asset allocation for its foreign reserves, but that will mean further detachment from dollars of which China holds the most. This puts China in a real dilemma,” said Xiao Minjie, senior economist at Daiwa Institute of Research in Tokyo.

For a factbox on Asian central banks’ views on gold, click [ID:nSP429396]

Perceived dollar weakness in coming years, which has been the other main factor driving up gold prices, is a source of concern for China and others with large investments in dollar assets as the depreciating currency erodes asset values.

A team of experts from Beijing and Shanghai set up a task force last year to study the issue of gold reserves, Ji Xiaonan, chairman of a supervisory board for big state-owned companies under China’s state assets commission, was quoted as saying.

“We suggested that China’s gold reserves should reach 6,000 tonnes in the next 3 to 5 years and perhaps 10,000 tonnes in 8 to 10 years,” the China Youth Daily on Monday quoted him as saying. [ID:nPEK200596]

Views seemed split among Chinese officials over the issue, Xiao, at Daiwa Institute of Research, said. Such a report might be a bid to send a message to the United States that China would buy gold if the U.S. didn’t stop a dollar freefall, he added.

OUTLOOK ON DEMAND, OUTPUT

China said in April its official gold holdings had risen to 1,054 tonnes from 600 tonnes in 2003, still making up less than 2 percent of its total foreign exchange holdings. The rise was from buying domestically produced gold to help soak up unsold output.

China, the world’s top gold producer and second biggest gold consumer after India, is expected to eventually tap the global market as domestic supplies will probably tighten on growing demand.

“China’s central bank buying has been limited to taking it from local mine production and scrap, which is a much cheaper method than buying either IMF or open market gold,” said Peter McGuire, managing director of Commodity Warrants Australia.

“China may tap the IMF or global marketplace for gold in order to expand its proportion of gold to forex holdings for the purpose of diversification and the desired quantities cannot be sourced on the lower cost domestic market,” he said.

China’s gold output rose 13.4 percent in the first seven months of this year to 172.867 tonnes, and it produced 26.36 tonnes in July, the China Gold newspaper said in September, citing figures from the China Gold Association. In 2008, China produced a record 282 tonnes of gold, and consumed 395.6 tonnes.

For a factbox on reserves held by China and India, click: here

For a factbox on top ten country holders of gold reserves, click: [ID:nSP482249]

EYES ON JEWELLERY DEMAND

Traders are watching to see if jewellery demand will persist even at current high prices, which would indicate expectations for further increases in prices.

A World Gold Council report last month showed that market supplies of recycled gold rose in the third quarter from a year earlier but fell from the first two quarters of 2009 despite rising prices, suggesting investors were releasing less gold in anticipation of a future market climb.

“We were hearing Chinese demand is strong, even expensive jewellery is being bought, which is bullish for the gold market,” said Wakako Harada, a senior trader at Mitsubishi Corp in Tokyo.

Gold’s rally, which pushed prices up 13 percent in November for a total rise of 39 percent this year, was briefly interrupted last week when investors dumped it to cover losses in other assets after markets tumbled broadly on news two Dubai flagship firms planned to delay repaying billions of dollars in debt.

For a timeline on gold prices, click: here

For a factbox on gold’s record highs, click: [ID:nSP415372]

But the sell-off spelt good buying opportunities for those who had lagged when prices raced up towards $1,200, traders said, citing expectations for the dollar’s continuing weakness and public sector interest as keeping bullish sentiment alive.

“There was a sense of a ceiling and that likely put a cap on prices,” said Yuichi Ikemizu, Tokyo branch manager for Standard Bank.

“At the same time, the unwinding of these “weak longs” was immediately countered by buying which helped bring prices off their lows. This shows there are still people who want to buy and underscores the bullish underlying trend.” (Editing by Clarence Fernandez) ((chikako.mogi@thomsonreuters.com; +81 3 6441 1871; Reuters Messaging: chikako.mogi.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))

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