Monday, January 09, 2006


Gold Market 'Too Small' For China : Analysts

Dow Jones Newswire has this report on gold and China. "The world gold market is too small for China to achieve any meaningful diversification into the precious metal, leaving it likely the country will instead follow a more cautious, dollar-bound investment path, analysts said Monday. Sentiment towards gold has been boosted since Friday, when it was reported that China may start to diversify its foreign exchange reserves away from the U.S. dollar and government bonds."

"Hu Xiaolian, director OF China's State Administration of Foreign Exchange, said in a statement last week that the agency plans to 'further improve the structure of currency assets in the foreign exchange reserve portfolio and continue to broaden foreign exchange reserves' investment channels.'"

"Taken by many market participants to be a plan to move into gold, the precious metal jumped from an intraday low of $523.15/oz to around $540/oz as the possibility was widely welcomed by gold traders. The metal reached a fresh 25-year high of $544.40/oz Monday."

"Analysts remain skeptical over the likelihood of an aggressive move into gold. 'We view China's ability to raise gold holdings to a meaningful level for diversification as constrained, as the gold market is too small for this to happen without a serious price distortion,' said Barclays Capital analyst Yingxi Yu."

"'If it were to raise (its gold holdings from 1.1%) to 10%, it would absorb some 4,680 tons, or around two years of global mine production. Investing in other commodities like oil and base metals would be more possible, or the outcome could well be a combination of elements from different asset classes,' she added."

"To bring China in line with other international standards is unlikely, said HSBC analyst Alan Williamson. 'For China to raise its gold in reserves to the international average of 8.9% would require the purchase of an additional 3,613 tons,' said Williamson. 'For China to raise its gold in reserves to the ECB benchmark of 15% would require the purchase of an additional 6,501 tons,' he added. By comparison, most European national banks have agreed to limit their total gold sales to 2,500 tons in the five-year Central Bank Gold Agreement, signed in 2004."

"A further problem comes from the fact that should China stop acquiring U.S. dollars with its reserves, the greenback would come under extreme pressure, something the Asian country has been keen to prevent in order to protect its export sector. For this reason, U.S. dollar-denominated treasuries and bonds look likely to remain the most desired assets for the Chinese, analysts believe."

"Also, it's still uncertain whether or not increased volumes of gold changing hands at the gold fix in recent weeks are anything to do with Asian central banks buying. 'We have no way of knowing if this is true,' said UBS analyst John Reade. 'We have no evidence that central banks in the region are adding to gold reserves, but we noted a lot more interest in the metal than we have seen in recent years,' Reade added."

Thanks to the reader who sent this in. Ron Paul pointed out once that the currency markets dwarf gold. There is so much paper out there now, that if a country like China started accumulating in a serious way, the price would skyrocket. More conundrums for the worlds central banks.
OT, but a question from an earlier post on purchasing used silver coins. You mentioned that such coins had "high silver content". Any idea how high?

I've been thinking of buying a few bags to squirrel away, but wondered how to value them. If their silver content is, say 80%, and they're sold by weight, can you purchase them at about 80% spot price?

Thanks for any info....
gs in be,

Pretty close. My dealer's sell price for "junk" silver is pretty much spot for the actual silver content. His buy price is cheaper, of course. ;)
I forget the exact number. It has to be hard enough to handle being in circulation. Gold bullion coins aren't 100% either. The Canadian Maple Leaf has/had a very high purity level and I've seen some that got scratched up.

I read once that pure silver is so malleable, an ounce can be made into thousands of feet of wire.
I read that the new silver ETF, just to get started, would buy up most of the silver on the COMEX. I can't find the article though. I think what this china story REALLY means is that gold is TOO CHEAP for them to buy and diversify!!!

This link should help:
Have you guys read about the potentially blockbuster new medical uses for silver? The idea is that coating invasive medical instruments and implants with microscopic layers of silver greatly reduces the chance of infection and is flat out deadly to viruses.

Something tells me that could drive the price up just a little bit...
thanks for the tip TJ. Anybody else intersted can look here:

sorry about the lengthy url
they call it nano silver, they are doing all kinds of things with it. I guess silver is real good at keeping away germs.
I believe silver content is 90%. It is, however, difficult to buy them in bulk, as the coin markets aren't all that liquid. Most sellers are geared to selling at a premium to people with economically "irrational" desire for them. You're much better off on the straight-up commodity market, as there are as yet too many people who believe in the intrinsic value of the coins.
Please read our discussions on the previous couple stories. We drilled down a bit on ETFs and holding physical metals. I got some great pointers from Ben and the guys.
In order for this silver ETF to begin operations, it would initially purchase 130 million ounces of physical silver. That amount is greater than all of the silver registered on the New York COMEX. It is such a huge quantity to move off the market at one time, that all parties agree that the price of silver could skyrocket... If this ETF went into business, there could be an immediate shortage of physical silver on the market. Within days, what silver could be obtained would certainly cost more than it has in the past 20 years.

Is The Next Major
Bullion Boom Underway?

Also, given the movement of the dollar as of late, I'd bet, er, am betting, that China is making broad-based investment in commodities, up to the point where the market gets too tight. (I'd love to know who is making those decisions...)

I've got to think that the Chinese have decided that there is no future in the dollar. They are hamstrung, as is the rest of the world, but they are feverishly looking to minimize their exposure. They know it's downward-bound, and are in the process of accepting the fact that they will take some lumps over it. Now the game is about how much they'll lose. Whether it's Bernanke's helicopter, or the Mexican standoff with other nations as to who will get out first, they have to have realistic contingency plans that take either or both into account.

Unlike the entire US economic punditocracy, which seems to feel that pointing out the obvious would, by itself, destroy the whole system, other countries are facing reality.

What happens is anyone's guess. I'm predicting that huge, uncoordinated flows sequentially go (in no particular order) into the yen, the euro, and the currency markets of the developing world, and bounce out again. A lot of value will be destroyed. I believe they're accounting for this.

The fact is, the US dollar has been punching above its weight for quite some time. There just isn't as much value in the world as currency markets would indicate. A huge, universal devaluation is in the cards, and gold/silver/platinum/etc. aren't big enough to take up the slack. Count me in the depression camp.
Re: Silver ETF. Despite the potential market disruption, Barclays must think there is a reasonable chance that it would be approved or they wouldn't bother right?
I think you missing the point.

"and gold/silver/platinum/etc. aren't big enough to take up the slack"

This is exactly, why the price will go thru the roof.
(At least I hope.)
I predict gold will go to $680 and silver to $16 by end of 2006. Does anyone see weakness in metals for 2006-2007? What would be the counter argument? This stuff only makes 5% of my holdings.
I come from the perspective not predicting price levels. I positiveley convinced that we are in the metals bull market. However any particular year can be negative. Make no difference to me.
Actually I welcome pprice setbacks. It gives me more time to buy stocks I like. I dont expect longterm top occur sooner than in 3 years. Could as well be in 8 years. And that is good, because it will give price more time to advance. Means more profits.
I think this is little bit better way to aproach it and craft the strategies.
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