Will China convert its FOREX reserves?

While in Las Vegas last week, I was told in no uncertain terms by a well known gold industry analyst that China had no interest whatsoever in converting any of its foreign exchange reserves into gold bullion.

Recall that the country has a mere 2 percent of its reserves in gold versus the recommended allocation of about 15 percent favored by European countries (don't ask how they arrived at that figure - I have no clue).

Anyway, after the events of recent weeks, Dan Denning seems to think that the Asian giant may see things a little differently now, as he discusses in this story at Commodity Online.

Do you think China would like to convert some of its $2 trillion in forex reserves into gold? Or would China, through its various state intermediaries, prefer equity in resource shares listed abroad, so that is actual ownership of key strategic resources? Why not both?

"Both" appears to be the answer suggested by Paul Glasson from KPMG, who has lived and worked in China for years. He helps Aussie firms do business with Chinese firms. His presentation on Monday was fascinating. He explained in detail how Chinese investment decisions wind their way from the Communist Party in Beijing to the stock market in Sydney.

China and Gold both have huge roles to play in the coming months. It's clear by now that the American model of asset-based wealth generation through leverage, debt, securitisation, and trading is failing badly. But there is still a lot of wealth denominated in US dollars to be put to the sword.

Also in this article is a note that cash costs of production continue to rise for gold miners, up some 27 percent in the first half of 2008 from the year before, putting the cost of production somewhere north of $600 per ounce, by my calculation.