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Gold is Safe Haven Asset, says China's Central Bank

Release Date: 
Tuesday, December 27, 2011

Gold prices were initially higher on a lower dollar on Tuesday, but later fell in thin holiday trading. The price of gold was $1598.60 per ounce at 7:00 a.m. Pacific Time on the New York Spot Market while silver was priced at $29.11 per ounce.

Analysts will be following the Italian bond auctions later this week after the 10-year Italian bond interest rate rose to a level generally viewed as unsustainable. European Central Bank (ECB) executive board member Lorenzo Bini Smaghi said the bank should launch a U.S.-style asset purchase program if economic conditions shift, opening the door to a potential change in monetary policy.

The research chief for China's central bank advised the government to increase its gold reserves. Gold has become "the only safe haven for risk-averse investors" when other assets from government bonds to property are losing value, said Zhang Jianhua, the head of the research department at the People's Bank of China. "The Chinese government... needs to further optimize China's foreign exchange asset portfolio and to seek relatively low entry points to buy gold assets," Zhang wrote.

The world's major central banks are expected to pump more liquidity into money markets to support sagging economic growth, according to Zhang, who cites the Bank of England's restarted quantitative easing program as one example that adds to gold's appeal. "Gold's outlook remains supported in the medium to long term by central banks' gold buying, among other factors," said Li Ning, an analyst at Shanghai CIFCO Futures.

"It's unknown whether newly-injected money will help to boost fragile investor confidence, but it's quite predictable that liquidity would flood again to create additional inflationary pressure," Zhang wrote.

(Sources: "China research chief advises Beijing buy gold," CNBC, December 27, 2011; "PRECIOUS-Gold falls; US data, Europe eyed," Reuters, December 27)

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