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China's Central Bank Encourages Physical Gold Buying

Release Date: 
Monday, November 12, 2012

Gold prices rose today on continued concerns over the fiscal cliff and liberal monetary policy in the U.S.  Gold was $3.20 higher at 7:13 a.m. Pacific Time on the New York Spot Market, trading at $1,735.00 per ounce.  Spot silver was $.10 lower, trading at $32.63 per ounce.  (Click here for the most current spot prices.)

"The gold price is up because of a combination of the outlook for an expansionary U.S. monetary policy and fears over the 'fiscal cliff'," said Eugen Weinberg, global head of commodities research at Commerzbank.  He said gold prices could rise further and potentially break above $1,800 per ounce in the next few weeks.

China's central bank policy is to encourage residents to hold physical gold, said Xie Duo, general director of the financial market department of the People's Bank of China (PBOC), at the London Bullion Market Association (LBMA) conference in Hong Kong.  PBOC General Director Xie Duo said the central bank had not set a time-frame on issuing more gold import licenses to banks but is eager to further open up the market to the international community.

Several analysts have recently said they expect demand for gold to rise in China on strong consumer demand and central bank buying.

Gold prices may reach $2,000 an ounce in 2013 as rising costs and production constraints limit supply, while demand from central banks and Chinese consumers keeps climbing, Barrick Gold Corp, the world's biggest gold producer, said.  Barrick Chief Executive Jamie Sokalsky said "if demand continues to rise, which we think it will through China buying more gold, more investment demand for gold, (and) central banks continuing buying more gold rather than selling as they used to, I feel quite comfortable predicting that gold prices will within the next year be at $2,000, perhaps higher," Sokalsky said. "It's going to be a demand-driven type of move.”

The Chinese government may add more gold to its reserves as the precious metal accounts for a lower share of total holdings compared with the U.S., according to the London Bullion Market Association.  “When comparing China to the U.S., it would seem that in China, gold asset allocation can only go in one direction,” Chairman David Gornall told the association's annual conference in Hong Kong. “The country has only 2 percent of its reserves in the form of gold compared with the U.S. at 75 percent.” 

James West, portfolio adviser to the Midas Letter Opportunity Fund, said “China is buying gold to hedge itself against the debasement in value of its U.S. bond holdings as a direct result of quantitative easing.”

“Emerging-market economies from the G-20 countries are looking to elevate their gold holdings,” said Ashish Bhatia, manager of government affairs at the World Gold Council. There's “renewed interest from central banks on the demand side.”

(Sources: “Barrick Gold sees gold prices hitting $2,000/oz in 2013,” Reuters, November 12, 2012;
UPDATE 3-China seeks to open gold mkt further, Shanghai plans ETFs,” Reuters, November 12, 2012; “PRECIOUS-Gold near 3-week high; focus on US fiscal cliff,” Reuters, November 12, 2012; “China Lags U.S. in Gold Holdings, May Raise Total, LBMA Says,” Bloomberg, November 12, 2012; “Gold futures rise more than 3% for the week,” Marketwatch, November 9, 2012)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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