China’s central bank warned that record gold prices are the result of an asset bubble, shortly after comments this week from government officials that China plans to greatly expand its gold reserves. But are these warnings intended to drive the price down so China can expand its gold reserves at a lower cost? For more on this, see the following article from Commodity Online.
As gold prices zoomed to a historic record of $1217 per ounce in European and American trading, a serious warning hit the bullion market on Wednesday. The warning came from China’s central bank — the People’s Bank of China — that said gold prices are sitting on an asset bubble.
After the US credit bubble of last year, and the ongoing Dubai debt troubles, it looks the golden rise of gold prices is not going to last long, if the Chinese central bank warning is of any indication.
Bullion speculations, Comex traders, central banks and analysts of all sorts have been predicting that a commodity bull run led by gold is on, and the yellow metal prices would soar to at least $2000 per ounce. Going by the current bull run in gold—the yellow metal has gained by more than $200 per ounce in the last two months—it looked certain that gold is set for big gains in the coming months.
But the stern warning from the People’s Bank of China is a big statement that needs to analyzed by bullion traders. Are the fundamentals in gold’s meteoric rise right? How far will it go?
Now, getting back to the story of the day, on to what exactly the Chinese central bank said:
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“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.
Asked if China had plans to increase its gold holding in its foreign exchange reserves, the Chinese central bank official said: “We must watch out for bubbles forming on certain assets, and be careful in those areas.”
The moot question now is: Is China trying to bring down gold prices that are beyond the reach of several central banks and bullion investors? China has been eyeing to buy gold reserves from the International Monetary Fund (IMF). But last month, India jumped into the fray and bought 200 tonnes of IMF gold. India paid $1,045 per ounce of gold to IMF.
China is also eager to buy IMF gold, but not at this high price that India has paid. China obviously wants prices to crash, so that it enables the country to amass more gold reserves at a lower price.
So the point of argument is that China is willing to buy IMF gold, but not at the high price that India paid. Gold price may be zooming to records; but China wants to wait and watch so that prices of the yellow metal crashes to realistic levels.
China, in fact, wants to buy gold cheap, around $800. Will IMF sell gold to China at $800? It will be a dream wish the part of China.
Coming months are going to be exciting for bullion traders, gold buyers and consumers. While gold jewelery buyers in nations like India and China are fretting and fuming over the unaffordable price of gold ornaments, bullion speculators are merrily jacking up the prices, thinking that gold at $1500 will give them life-time riches.
This article has been republished from Commodity Online. You can also view this article at Commodity Online, a commodity news and analysis site.