Wikinvest Wire

China and the gold "bubble"

Wednesday, December 02, 2009

According to this story in Commodity Online, the folks at the People's Bank of China are starting to sound like some whiny U.S. investors who have refused to buy gold bullion as the price has continued to soar, now calling it a bubble to rationalize their failure to take action at lower prices (there will be much, much more on the gold "bubble" here in a few hours).

Chinese Central Bank says gold prices on a bubble
“Gold prices are currently high and commodities markets should be careful of a potential asset bubble forming. We must keep in mind the long-term effects when considering what to use as our reserves," Hu Xiaolian, a vice-governor at the People's Bank of China told journalist in Taipei.

In fact, it is interesting that the Chinese central bank has come out with such a bold statement on gold. On Monday, a top Chinese official announced that the country is eager to increase its gold reserves to 6000 tonnes in the next 3-5 years and 10000 tonnes in the next 8-10 years. Big, golden ambition, indeed. But considering the fact that China has now 1054 tonnes of gold, taking the yellow metal reserves to 10000 tonnes in the next 10 years is going to be a challenging task.

China, the fifth largest holder of gold in the world with 1054 tonnes, has been aggressively trying to mop up gold reserves to its foreign exchange reserves.
It's understandable that, here in late-2009, if you only owned one-sixth or one-tenth of the gold that you planned on owning, you'd be more likely to call gold a bubble that is about to burst in the hopes that others will agree and you'll be able to get in at lower prices.

Of course, China has always said that they plan to get most of their new gold reserves from domestic production at much lower prices rather than on the open market. The nature of their government will certainly help this cause in the years ahead if the gold price continues its ascent. Buying gold at $800 an ounce from domestic mining companies when the market price is well over $1,000 is not something you could pull off in most of the world.

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Anonymous said...

China has been talking down the price of gold for years now, while they are buying it as fast as they can.

They will probably continue this lying for years to come.

I would become worried when China announces that gold is undervalued.

Chuck Ponzi said...

$800/oz to produce in China? Can you help us out where you got this independently?

I didnt' realize that sourcing Gold from China was so much more expensive than the rest of the world.

I thought we had established several months ago that cost of production was $550-650 oz on the margins (which is up considerably from several years ago). What changed in the meantime?

Tim said...

I think some Chinese central banker said that they'd be willing to buy at $800 - that's where this came from.

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