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London Gold Market Report

Fri, Apr 24 2009, 12:22 GMT
by Adrian Ash

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Gold Gains above $900 as China Reveals 75% Rise in "High Quality" Hoarding

THE SPOT PRICE OF physical gold bullion added a further $8 per ounce to yesterday's $13 jump in Asian trade Friday, hitting its best level in April so far on news that the Chinese government has sharply increased its Gold reserves.

Crude oil broke just above $50 per barrel, while US Treasuries slipped but UK gilts recovered from Thursday's drop.

Tokyo's Nikkei index ended the week 2.3% lower, while Tocom Gold Futures ended 2.8% better from last Friday's finish at ¥2,851 per gram.

Today's AM Gold Fix here in London was set at $909 an ounce, more than 4.2% above last Friday's finish.

Gold stood more than 5% better for UK investors, but only gained 2.9% from last week vs. the European single currency.

"China's foreign-exchange reserves have absolutely exploded in the past few years," said Jan Lambregts at Rabobank in Hong Kong to Bloomberg earlier.

"We shouldn't be surprised that they're adding a lot of all asset classes."

Hu Xiaolian, head of Beijing's State Administration of Foreign Exchange (SAFE), today told the Xinhua news agency that her country's gold hoard has risen by 75% to 1,054 tonnes since the last official statement in 2003.

That puts China at No.5 in the central-bank league of major hoarders, behind the US, Germany, France and Italy.

Overall, however, China's foreign-currency reserves have swelled five times over to $1.95 trillion, predominantly holding its wealth in US Treasury debt.

"We have strict rules on the much-debated issue of diversification," said Hu in today's interview.

"We must stick to major currencies and high-quality assets."

Even with the Gold Price trebling against both the Dollar and Yuan since end-2003, gold now accounts for just 1.6% of Beijing's total foreign exchange reserves, down from 1.9% five years ago.

"These comments indicate that China will buy more gold as reserves to improve its foreign portfolio," reckons one local asset manager. "This is a trend."

"It's not a matter of a few hundred or 1,000 tonnes," says Hou Huimin of the China Gold Association to Reuters.

"China should hold more because of its new international status, and because of the financial crisis."

"They have a long way to go," agrees Jonathan Barratt of Commodity Broking Services in Sydney, Australia.

"Look at the size of their [total] reserves. They should probably double it at least."

Now the world's No.1 Gold Mining nation thanks to the collapse in South Africa output, China is widely assumed to be building its hoard through direct purchases at local pit-0-heads.

"China has [also] been buying via government channels from South Africa, Russia and South America," reckons Ellison Chu at Standard Bank in Hong Kong.

Several analysts believe the much-touted IMF Gold Sales of 400 tonnes – re-stated at this month's G20 conference of leading economies, but not yet approved by majority shareholder the United States – would give China a fresh "off market" route to Buying Gold too.

"There is still some downside risk," cautions Manqoba Madinane at Standard Bank, "as the SPDR Gold Shares ETF realized a 49,129-oz outflow in New York yesterday, which could inhibit sentiment towards gold.

Dropping 1.5 tonnes on Thursday, backing for the world's largest Gold ETF previously jumped 325 tonnes in the first 3 months of this year, swelling to 1,104 today.

"Primary support and resistance are at $902 and $915 respectively," reckons Madinane.

Meantime on the data front today, the UK economy showed a 4.1% contraction during the first 3 months of this year compared with the start of 2008 – its worst recession since Margaret Thatcher took power in 1979.

Germany's Ifo survey of business and investment sentiment showed a better-than-expected rise for April, helping push the Euro up to new one-week highs above $1.32.

European stock markets rose sharply, meantime, unwinding this week's losses as Ford Motor Co. failed to dent US futures with news of its worst quarter in 17 years, burning $3.7 billion in cash.

Published on  Fri, Apr 24 2009, 12:24 GMT