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Bill Bonner: Americans have been liberated from their own houses
3:40p ET Monday, January 9, 2006
Dear Friend of GATA and Gold:
Like so many other news stories, the Dow Jones story
appended here seems meant to discourage investment
in gold, one-sided and studiously avoiding its own
contrary implications.
The story proclaims that the gold market is much too
small to accommodate any attempt by China to diversify
its huge U.S. dollar balance in foreign exchange.
Of course that's just a negative way of saying what
you've heard from GATA and its friends like Wits
Gold Chairman Adam Fleming -- that even a small
diversification of world financial assets into gold,
a diversification no larger than what was customary
just 20 or 30 years ago, would send the gold price
soaring and steamroll the central banks in a blink.
Oh, no, China would never, ever sell dollars to buy
gold. And oh, yes, the whole world is perfectly happy
to cede its financial sovereignty to the United States
forever and ever.
These guys are whistling in the dark ... and it's
starting to sound like the Marche Funebre.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
Gold Market Said Too Small
for Chinese Diversification
By Andrea Hotter
Dow Jones Newswires
Monday, January 9, 2006
http://asia.news.yahoo.com/060109/5/2doc9.html
LONDON -- The world gold market is too small for China to achieve
any meaningful diversification into the precious metal, leaving it
likely the country will instead follow a more cautious, dollar-bound
investment path, analysts said Monday.
Sentiment toward gold has been boosted since Friday, when it was
reported that China may start to diversify its foreign exchange
reserves away from the U.S. dollar and government bonds.
Hu Xiaolian, director OF China's State Administration of Foreign
Exchange, said in a statement last week that the agency plans
to "further improve the structure of currency assets in the foreign
exchange reserve portfolio and continue to broaden foreign exchange
reserves' investment channels."
Since this was taken by many market participants to be a plan to
move into gold, the precious metal jumped from an intraday low of
$523.15/oz to around $540/oz as the possibility was widely welcomed
by gold traders. The metal reached a fresh 25-year high of
$544.40/oz Monday.
According to World Gold Council data, China has around 600 metric
tons of gold in its holdings, about 1.1% of its total reserves. This
ratio is tiny when compared with countries such as the Netherlands
(722.4 tons or 51.3%) or the European Central Banks (719.9 tons or
20.6%), but closer to the gold reserves-holdings ratio of Japan
(765.2 tons or 1.3%). But analysts remain skeptical over the
likelihood of an aggressive move into gold.
"We view China's ability to raise gold holdings to a meaningful
level for diversification as constrained, as the gold market is too
small for this to happen without a serious price distortion," said
Barclays Capital analyst Yingxi Yu.
"If it were to raise (its gold holdings from 1.1%) to 10%, it would
absorb some 4,680 tons, or around two years of global mine
production. Investing in other commodities like oil and base metals
would be more possible, or the outcome could well be a combination
of elements from different asset classes," she added.
To bring China in line with other international standards is
unlikely, said HSBC analyst Alan Williamson.
"For China to raise its gold in reserves to the international
average of 8.9% would require the purchase of an additional 3,613
tons," said Williamson. "For China to raise its gold in reserves to
the ECB benchmark of 15% would require the purchase of an additional
6,501 tons," he added. By comparison, most European national banks
have agreed to limit their total gold sales to 2,500 tons in the
five-year Central Bank Gold Agreement, signed in 2004.
"The bulls in the market would argue that at a sharply higher gold
price -- an inevitability if China and/or Japan did begin to buy
gold on the open market -- the volumes required would be
commensurately lower. Nevertheless, liquidity remains a key
consideration," Williamson said, adding that his statistics are
based on a gold price of $528/oz.
Williamson said it was more likely China would look at utilizing the
gold reserves in a "more pro-active manner." "Rather than
accumulating U.S. treasuries, for example, the Chinese government
could use the reserves to secure energy and other commodity
resources overseas."
But he pointed out that such a strategy isn't without its problems,
as last year's attempted purchase of U.S. independent oil producer
Unocal by Chinese oil company CNOOC proved. The $18 billion deal ran
into significant political pressure in the U.S. and was abandoned
last August, with Unocal subsequently purchased by Chevron in
November, Williamson said.
A further problem comes from the fact that should China stop
acquiring U.S. dollars with its reserves, the greenback would come
under extreme pressure, something the Asian country has been keen to
prevent in order to protect its export sector. For this reason, U.S.
dollar-denominated treasuries and bonds look likely to remain the
most desired assets for the Chinese, analysts believe.
Also, it's still uncertain whether or not increased volumes of gold
changing hands at the gold fix in recent weeks are anything to do
with Asian central banks buying gold.
"We have no way of knowing if this is true," said UBS analyst John
Reade. "We have no evidence that central banks in the region are
adding to gold reserves, but we noted a lot more interest in the
metal than we have seen in recent years," Reade added.
Spot gold fixed in London Monday at $541.50/oz.
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