Wikinvest Wire

Will China convert its FOREX reserves?

Thursday, September 18, 2008

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.

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fish said...

As long as the Chinese move slowly, Paulson keeps the genie stuffed into the bottle for another 6 or 7 months and the GATA crew are correct I'm happy!

Chuck Ponzi said...


Just a joking question... if we can tax oil companies for getting windfall profits (in the face of a democrat in the white house and controlling the 2 houses), can we also put a windfall tax on gold miners as well?

Just a thought.

Chuck Ponzi

fish said...

Actually Chuck.....I think that thats a given. Remember: Win and the government wins with you....lose and you lose alone!

Anonymous said...

Just insane metal moves lately and most people don't even know what it means. Wait until they find out.

Anonymous said...

Interesting thought on the cost of production. I read recently where a mining CEO (Kinross, I think) was reported as saying that unless gold goes to $2000 many miners won't continue to develop existing deposits, let alone go looking for new ones. The implication is that $2000 sufficient to fund full mine life cycle with reasonable profit, in today's dollars. One way or another that is a very bullish statement.

staghounds said...

The immense Chinese holding of U. S. securities and cash is like an economic gun to our heads.

They just might not want to use it today.

Think what might happen if we got angry, or even just serious. That Bush might do something crazy, like refuse to pay non citizen bond holders. Or charge a $200/bbl sea lane protection fee for oil from Africa.

Wait until Sen. Obama gets in. He is safe.

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