by: Jeannette Rohn Showalter, CFA
January 25th, 2012
“Melting up” is new market jargon for a market strongly moving upward and gold has certainly been doing that since December 29th’s intraday low of $1523 an ounce. As of mid-morning January 25, gold is trading at $1629, a gain of 6.7% in one month. (OEC data feed)
Gold is a lot more than a safe haven for institutional and individual investors. It is one of the assets held in foreign currency reserves of various countries. These central bank buyers are very important to the gold market and here is a look at what China is saying and doing.
The biggest central bank’s foreign currency reserves are, obviously, held by China. As reported in past WWFS commentaries, Chinese holdings of gold as per cent of foreign reserves is extremely low and it has been speculated that China would be/should be adding to their gold holding during the recent market decline in gold in 4th quarter 2011.
And China had something to say about that. On December 25, 2011, a director of the People’s Bank of China Research Bureau made a press release of significance to the gold market. (Source: WSJ “PBOC Official: China Should Adjust FX Portfolio, Buy Gold Assets When Price Drops”) The release quoted Director Zhang Jianhua as saying. "The Chinese government should be wary of the risk of inflationary pressures picking up and should buy gold as a hedge against that possibility.” China has $3.2 trillion in foreign currency reserves.
And some would reasonably ask, “Why would the Chinese announce that they should buy gold on-the-cheap? It changed the price of gold and only made it more expensive for them.” Yes, but another thought is this: China is definitely making moves away from the US dollar as a reserve currency and maybe part of their agenda is to have gold be viewed as a more stable alternative, as part of the resolution to a falling US dollar.
And oddly enough, on December 26, 2011, China and Japan announced a currency agreement, “China and Japan have agreed to start direct trading of their currencies, officials announced during a visit here on Monday by Japan’s prime minister, Yoshihiko Noda.” (Source NYT, December 26, 2011 “Currency Agreement for Japan and China”) Really now, was that just odd or might it have been very well planned government quotes and events? And the date selection is amazing: December 25th and 26th, when the non American world is largely at work and when the North American world is largely closed for business.
In my opinion, there is a continued shift away from the dollar and into gold and other currencies. It used to be that we heard of world conferences threatening the US of loss of reserve status; now some of these countries are just doing it. The frenzied decline in December might have placed gold in much stronger hands, having very long term currency objectives..
Gold is traded in the Diversified Commodity Basket and Survival Plan. A mini gold contract is held in the Survival Plan as well.
Gold Chart
Regards,
Jeannette Rohn Showalter, CFA
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