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How Much Gold Can China Buy

May 25, 2013

There are monumental ramifications to China's dire and urgent necessity to buy gold to diversity foreign reserves.

In recent months much news has been aired about Beijing's keen interest in diversifying its material FOREX risk, since much of it is in the US dollar. It is reported 34% of China’s Total Foreign Reserves are in U.S. Treasury Bonds (T-Bonds) to the tune of US$1.2 TRILLION.

Until now no one has really delineated the monumental ramifications to China's necessity to buy gold to diversity foreign reserves. Consequently, I took a close look at the pertinent numbers.

http://en.wikipedia.org/wiki/List_of_countries_by_foreign_exchange_reserves

To appreciate the findings it is necessary to show the following basic data:

China has $3.3 TRILLION in foreign reserves, which grow continuously by the hour (in numbers that is $3,300,000,000,000). About 34% of these reserves are concentrated in the U.S. Dollar (ie over $1 TRILLION).
China's gold as a percent of Total Foreign Reserves is LESS THAN 2%....And recently it is reported China plans to increase the gold reserve percentage by an additional 3% to a 5% goal.
There are approximately 33,000 troy oz in a tonne
Total annual gold production in the entire world is a mere 2600 tonnes
What is absolutely certain is that China must diversify its foreign reserves out of the US Dollar and into other major world currencies, including gold.

Needless to say China has for some time been covertly buying gold...and most certainly will continue to accumulate gold until it reaches its prudent target of 5% of its Total Foreign Reserves. However, we need to remember (and take into account) China's U.S. dollar reserves will continue to mount DAILY as long as the U.S. Trade Deficit is a reality. To be sure, the ONLY way for the U.S. Trade Deficit to reverse is to sharply devaluate the greenback, which would propel the price of gold into orbit....that much faster.

To increase its gold reserves by 3%, China needs to buy nearly $102 Billion in gold on the open market. THIS IS NOT POSSIBLE WITHOUT CAUSING THE PRICE OF GOLD TO SKY-ROCKET. However, for the sake of this illustration, let's assume China could buy it all at a fixed price of $1700/oz. In this event China would acquire approximately 62,000,000 ozs, equivalent to about 1,874 tonnes.

Let's put this into perspective. 1,874 tonnes represents 72% of the total yearly gold production in the entire world (ie 2600 tonnes). Incredible but true, China must buy NEARLY an entire year's gold production in the entire world to increase its gold reserves from 2% to 5% (as a percent of its Total Foreign Reserves).

But as I previously mentioned THIS IS NOT POSSIBLE WITHOUT CAUSING THE POG TO SKY-ROCKET.

EVEN AT 5% CHINA IS STILL A LONG WAY FROM ADEQUATE FOREX DIVERSIFICATION

All the major developed countries of the world (USA, Euro Union, Germany, Italy & France) have gold holdings on average of 74% of their Total Foreign Reserves. This contrasts sharply with China, which has less than 2% of its total Foreign Reserves in gold. See: http://en.wikipedia.org/wiki/Gold_reserve

OBVIOUSLY even at 5%, China’s Gold Reserves are still a far cry from the gold reserves of major global nations, whose gold reserves amount to 74% of their respective Total Foreign Reserves. For China’s gold reserves to reach this lofty goal (ie 74%), the Sino nation would be obliged to buy up the entire world’s yearly mine supply for the next 17 YEARS. Needless to say the price of gold would go parabolically into orbit in this event.

Summation of the Monumental ramifications to China's dire and urgent necessity to buy gold:

China's gold purchases will continue unabated for years to come, during which the price of gold may reach US$2500 to US$3500/oz in the next couple of years

Furthermore, a gold price rising to $3500/oz by 2015 is well within the realm of possibility vis-à-vis China’s necessity to diversify foreign reserves. This will inevitably be fuelled by the US Fed QE3 monetizing the massive issuance of US Treasuries to finance President Obama’s programmed $17 Trillion deficit during the next few years – with the objective of stimulating the US economic growth, and especially reducing the unacceptably high UNEMPLOYMENT RATE..

In light of the above, gold between $1900-$2000 within the next few months -- and $3500 eventually are feasible and logical price goals. However, the speed of the U.S. dollar decent (and the implementation of unlimited QE3) will help determine how fast AND HOW HIGH the gold price will ascend.