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September 23, 2009

China More Likely to Keep Purchasing Gold

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It is said from a commercial banker on Tuesday that China is more likely to keep purchasing gold from its domestic producers rather on the global markets if it decides to increase its stockpile.

The State Administration of Foreign Exchange, an arm of the central bank, disclosed in April that it had raised its gold reserves to 1,054 tonnes from 600 tonnes since 2003 — but by buying from local producers and on the domestic market.

“China has no need at all to buy gold from the international markets,” Lila Lu, head of precious metals at Minsheng Bank Corp, told Reuters.

“Because China is a large gold producer, it can source gold directly from its domestic makers, most of which are state-run enterprises,” she said.

Minsheng, a medium-sized commercial bank based in Beijing, is China’s first listed non-state lender.

Analysts expect China to add to its gold holdings as a hedge against dollar depreciation, and speculation is swirling that Beijing will buy some of the bullion being offered for sale by the International Monetary Fund.

“It’s possible. It would be normal if we did buy, but it may also be a rumour,” Lu said.

Chinese officials have said they are keen to diversify the country’s $2.13 trillion of official currency reserves, some 70 percent of which are invested in dollar-denominated securities.

But Lu said there was no reason for China to dip into its reserves to buy gold.

“China has many other ways to invest its foreign exchange reserves. Why should we use dollars to buy gold? We can use yuan instead to purchase gold from domestic producers,” she said.

China surpassed South Africa in 2007 to become the world’s largest gold producer and output reached a record high of 282 tonnes in 2008. In the first half of this year, production rose by 13.5 percent from a year earlier to 146.5 tonnes.

Lu said she saw growing Chinese investment demand for gold, especially gold-linked products that can be more easily traded than bullion. These include “paper gold” sold through banks and margin trading on the Shanghai Gold Exchange.

“While I don’t see much change in physical gold trading, I feel that paper gold and margin trading will see big growth in China in coming years,” Lu said.

She said she expected turnover on Shanghai’s gold bourse to fall this year because of reduced price volatility.

Minsheng traded 208.3 tonnes of gold, or 13.3 percent of the exchange’s total, in 2008.

She said global economic uncertainty and the prospect of further dollar weakness could push gold up to $1,200 an ounce by the end of this year. The metal rose about $9 on Tuesday at $1,011.55.

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