Forecaster - Global Watch
Chinese Gold & Foreign
Exchange Reserves to be used for Nation building!
January 13, 2006
"China has taken a
major step forward in the handling of its reserves, which could
lead to a drop in supply to the gold market and the U.S. Trade
Deficit becoming an entire Balance of Payments deficit as the
Capital account surplus drops!"
On the Official Chinese government's
website, China's foreign exchange regulator said one of its targets
for 2006 was to "improve the operation and management
of foreign exchange reserves and to actively explore more effective
ways to utilize reserve assets. The objective is to improve the
currency structure and asset structure of our foreign exchange
reserves, and to continue to expand the investment area of reserves.
We want to ensure that the use of foreign exchange reserves supports
a national strategy, an open economy and the macro-economic adjustment."
announcement came from the State Administration of Foreign Exchange
(Safe). Will this mean a change in Chinese Gold & Foreign
Exchange Reserves, now at nearly $800 Billion at the end of 2005
and expected to approach $1,000 Billion this year?
In our last article on this
subject we described how the Yuan Revaluation was the beginnning
of the process of moving away from the $ in the accumulation
of Chinese reserves. Now this statement extends to the actual
management of existing reserves, with the future growth of the
country and its place in the global economy in mind.
With these reserves almost
exclusively in the U.S. $, this statement signals a lowering
of the U.S. $ content in the Reserves, as China cares for its
Will China include
Gold in this policy ("We want to ensure that the use
of foreign exchange reserves supports a national strategy, an
open economy and the macro-economic adjustment")? We
believe it will. We do not expect Chinese produced gold to be
sold to the Chinese public for much longer. We would expect
the Chinese public to buy gold that has been imported by banks
in China, from the global market at market prices.
But to acquire gold
for the country's reserves, the purchase of local gold from
local producers at market related prices would avoid the Bank
of China being visible in the gold market. This would ensure
they had access to gold without chasing prices and make certain
they paid real market prices. China has shown a liking for gold
in its reserves, but the percentage has dropped as $ reserves
have grown. It remains to be seen, but is unlikely that China
will enter the global market to buy gold for its reserves, unless
it can do so without causing a price 'spike'.
But the impact of this on
global gold markets would be heavy. 200 tonnes of gold would
not appear in the supply side of the market, with the Chinese
market taking off that amount from the global market and more.
This would exert more pressure on a market where supplies have
dropped not only through lower gold supplies from Producers,
but from fewer and smaller sales of gold into the market. As
a result prices would continue on their upward path for some
years to come.
N.B.: The entire three-page report is available
In the second part of this
article we will look at the potential and consequences, of Capital
Controls, a clear prospect for the global monetary system, eventually.
to "Gold Forecaster - Global Watch," please go to: