July 7, 2010 / 12:00 PM / 9 years ago

TEXT-China spells out gold reserve policy

BEIJING, July 7 (Reuters) - Following is a translation of a statement on gold reserves by China’s State Administration of Foreign Exchange on Wednesday. [ID:nTOE66604R] [ID:nSGE6660CY]

Q: Is China planning to further increase its gold reserves? When?

A: Gold is globally recognised, is a store of value and can be used for urgent payment. However, there are some limits to investing in gold and it cannot become a main channel for investing our foreign exchange reserves.

First, the size of the gold market is limited. Annual global gold output is about 2,400 tonnes and there is a basic balance between its supply and demand now. If we buy a large amount of gold, it will surely push up the global gold price. China’s gold price basically matches the global level, so when Chinese people go to buy gold jewellery in shopping centres, they face surging prices. That will eventually hurt the interest of Chinese consumers.

Second, the gold price is very volatile. The global gold price is much affected by currency rates, geopolitical changes, supply-demand relations and speculation. It often fluctuates. In addition, gold investment does not generate interest returns, but investors have to bear warehouse, transportation and insurance costs. Looking back at its performance over the past 30 years, the risk-return balance of gold is not very good. Gold can help counter inflation, but quite a few other assets can too.

Finally, increasing the gold reserve will not help much in diversifying China’s foreign exchange reserves. In the past few years, we increased the gold reserve by more than 400 tonnes. Our country’s gold reserve has already reached 1,054 tonnes. Even if we double the amount, it can only diversify between $30 billion to $40 billion of the foreign exchange reserves, and the proportion of gold reserve in our foreign exchange reserve will only increase by one or two percentage points.

In conclusion, we will take careful consideration of our demand and the market situation when reducing or increasing our gold reserves. (Editing by Anthony Barker)

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