China wants to buy $93 billion worth of gold March 01, 2009
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
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
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
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