While I believe gold jumped Friday on this news regarding China building its reserves, the more important question to ask is over the longer run in terms of "why" and "implications for the dollar some far off day in the future". I'm not going to ask those questions because the solution to everything is print more fiat currency and someone will buy them, and if not someone, we will buy them ourselves... but for those who care about "the very long term" (I've given up) it is something for you to think about.

It appears the last time China disclosed this information was 2003 when they were up to 600 tonnes, so this move to 1,054 is large in magnitude but spread over 6 years since the last update - hence not quite so exciting as first glance would have it appear. Considering how large their reserves have grown the past half decade, this should not be all that surprising - the gold is still only 1.5% of their foreign exchange reserves. I'd be very curious (a) how much of that buying has been done in the past 6-12 months and (b) why they decided to conveniently release this information now ... the last question is rhetorical.

This moves China to the 5th spot among nations, with France and Italy at over double at 2,400 tons. IMF (which has been selling) and Germany are at 3,200 to 3,400 and the US still has 8,100 despite selling off a lot over the years.

With all that said, it was very strange to see gold moving up together with equities - they have been an inverse relationship for quite a while. So we'll see in the coming weeks if the gold strength is a foreshadow of things to come or simply a knee jerk reaction to the China disclosure.

Via Bloomberg

China boosted its gold reserves by 76 percent since 2003 and has the world’s fifth-biggest holding by country, said Hu Xiaolian, head of the State Administration of Foreign Exchange.

The nation increased its reserves by 454 tons to 1,054 tons through domestic purchases and refining scrap metal, Hu said in an interview with the Xinhua News Agency today. The amount is more than Switzerland’s 1,040 tons, World Gold Council data show, and is worth $31 billion at current prices. ($31 billion aka one Citigroup bailout)

China has the world’s largest foreign exchange reserves at $1.95 trillion as of March 31, according to state administration data. The holdings have climbed about sixfold in the past six years as the country had record trade surpluses and inflows of foreign investment.

China, the world’s biggest gold producer, has increased its holdings before, Hu said in the interview carried on the administration Web Site. They rose from 394 tons to 500 tons in 2001 and to 600 tons in 2003, it said.

“This shows a change in attitude in Asian central banks,” said Si Kannan, associate vice president at Mumbai-based Kotak Commodity Services Ltd. “While the IMF is selling gold, Asian central banks are diversifying into gold. That’s a good thing, in times of dollar uncertainty and the global volatility in the forex market,” he said by phone from Mumbai today.

By purchasing from domestic producers, China demonstrated that it has the ability to acquire substantial amounts of gold in a way that is difficult for the international market to track and therefore not disruptive to prices.

Long Powershares DB Gold Double Long ETN (DGP) in fund; no personal position

Trader Mark
www.fundmymutualfund.com

Buy JAG now ... Read their latest operational update:
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They will become increasingly profitable from here own simply because of their rapidly increasing gold production. Their production cost is also one of the lowest in the industry and they can be quite profitable even if gold drops to below $600.

Remember, the US dollar in its current form is only ~40 years old. One possibility is that China will accumulate enough gold (note it has a vast share of the world's production as well), then switch to the gold standard. Then to keep the dollar from falling and save their trillions, they can peg the dollar to the yuan (unlike now, where they peg the yuan to the dollar). Just semantics :)

The demise of the US dollar versus yuan is almost inevitable ... now that other countries (especially China, Taiwan, Japan) have seen how the US could abuse its power to having the world's reserve currency. My suggestion to Congress is to quit worrying about the deficit. Make the debt as big as possible now before it becomes too difficult to borrow US dollars we can print.

Americans who worry about too much US debt, and compare it to their own personal indebtedness and the failures of other countries simply don't understand. As a nation, America owes all its debt in US dollars. Imagine clicking print (instead of pay) and your credit card bill is taken care of. The only smart thing to do is to spend as much now while this is still possible. The world will not let this go on much longer no matter how the US behaves - America has lost its credibility.

The fundamentals of the yuan have been strong for a while, but if China does not want it to appreciate it is hard for it to raise.

>> but if China does not want it to appreciate it is hard for it to raise.

It's a matter of supply and demand. If a lot of poeple want Renminbi it WILL rise.
The US government is doing anything and everything to get the dollar down and look at the impact....

If anything, one dollar gets you more than it did a year ago.

The point being that government does not have full control of the value of it's currency. Not even the chinese government.

The US Government is not in control of a sovereign wealth fund.

I never said they (Chinese Government) had FULL control, I said it would be hard for it to appreciate if the Chinese don't want it to. I own some chinese stocks that generate their revenue solely in China, so it would be great for me to see it appreciate. I believe in the long run it should appreciate, but not now that the chinese are so dependant on exports. (The irony is the trade surplus is great fundamental for a currency).

BatBeer2: "The point being that government does not have full control of the value of it's currency. Not even the chinese government."


The Chinese currency is different from the American one. China has capital controls and is largely pegged to the US$--basically you can't exchange the currency freely at will and can only exchange it within the governemnt-prescribed range--so the government can keep the currency down. It's not perfect but, in addition, the fact that China is run by a totalitarian government likely means they have far more control over their currency than even other countries that have controls as well. You can observe the control by the Chinese government by noticing how the reminbi has never veered outside the government-sanctioned peg to the US$.

In contrast, the US$ is a free floating currency and the American government has limited control over it. The Federal Reserve can influence it (by printing a lot of money, or withdrawing liquidity, or raising interest rates, etc) but the influence is limited. So with the US$, as you point out, supply & demand can drive the currency to almost any value.

Also, when they buy foreign assets trough their sovereign wealth fund they are increasing the renmibi supply in the currency exchange market.

>> China has capital controls and is largely pegged to the US$--basically you can't exchange the currency freely at will and can only exchange it within the governemnt-prescribed range--so the government can keep the currency down.

It works till it breaks. If demand for the renminbi rises enough, the price will rise. This is not theory mind you. Controlled exchange rates work only if governments work together (EU currencies pre- euro for example.)

Put another way, if the exchange rate is perceived to be unrealistic, the Chinese government will be fed dollars till they choke. At that point, the market takes over and a realistic rate is set.

Batbeer - "the Chinese government will be fed dollars till they choke" - or they can buy something else with the dollars until that other thing chokes ...They can also "print" an unlimited amount of renminbi as they become the world's next reserve currency (or at least for that other half of the world) ... this is already happening.

Taiwan businessmen for example are increasing their holdings of yuan when not so long ago, they would only accept payment in dollars. Imagine when Apple puts in the manufacturing order for iPhone 4.0 and Foxconn or Quanta tells Cook, sorry no dollars, we only accept yuan or hmmm, okay we'll take iPhones too.

Batbeer2: "Put another way, if the exchange rate is perceived to be unrealistic, the Chinese government will be fed dollars till they choke. At that point, the market takes over and a realistic rate is set. "


Yep... this is one of the huge risks in China right now. There is no free lunch in economics and no one really knows how the end game will play out . The consensus is that the renminbi is undervalued so China has seen speculative capital flows into the country over the years (even with their strict control.) But I personally am not sure it is as overvalued as many claim. A huge chunk of China's economy is dependent on a cheap currency and it's not clear to me that China can handle a strong currency.

Calling currencies is extremely dififcult, unless your last name is Soros :) A lot of people bet a lot of money over the last few years that the US$ was overvalued and would decline. Yet it went the other way recently, and re-traced almost all the decline in the last year and a half, and many have lost a fortune. So what's the correct call on the US$? It's really hard to say. On the one hand, weak American growth implies the US$ should decline materially; but on the other hand, the current account deficit is shrinking, American savings rate is going up, and if this presists, as I think it will, the US$ will stay strong.

Similar to how the consensus was wrong on the US$, I really wonder about the renminbi. How many renminbi bears have you seen? When was the last time such an overcrowded trade worked out? Just wondering (I have no position either way)...