Calling China's Bluff on Gold

March 31, 2010

Two weeks after a Chinese government official spoke on the use of China's foreign currency reserves to buy gold, prices moved closer to support levels. On March 9, Yi Gang, chief of the State Administration of Foreign Exchange mentioned that it is "unlikely" that gold would be China's primary alternative to forex reserves. According to Yi Gang, the reason for China's limited future investment in gold boils down to the "small" size of its market and that "China's purchase will push up the prices" and "hurt Chinese gold consumers."

Yi Gang's comments may seem rather misleading as they suggest that China's central bank may cease its plans for further gold accumulation. However, his comments are purposed with both lowering gold prices before China buys gold from the IMF or possibly another open market seller, and hinting that it will be accumulating gold by other methods.

First, you'll recall that over two weeks before the statement (Feb. 23), the IMF announced plans to sell gold, which helped push up prices to nearly $1,130--far too high for China to purchase on the open market. But, as we've stated in two previous commentaries, gold has strong support at $1,075 with the possibility of reaching as low $1,050. Last week, when Yi Gang made his comments, gold prices dipped close to this level ($1,083) affording China or any other central bank an opportunity to buy at a discount.

Second, if China fears pushing up gold prices for the sake of harming "Chinese gold consumers" (a likely claim, considering the Chinese government's televised attempts to advocate precious metals ownership), then acquiring gold through mining companies must be its alternative means of buying on the open market.

We already know that China has long been quietly adding to reserves without greatly disrupting prices by mining gold at home, through government- owned companies. Nonetheless, this is not a permanent solution to fulfill China's future gold reserve growth aspirations. Yesterday, the World Gold Council even pointed out that China's recent surge in mining activity could exhaust its gold resources in less than a decade. Thus, China's international gold mining and exploration ventures should garner considerable attention.

The government's gold outfit, China National Gold Group Corp (CNGGC), officially expanded abroad through Vancouver-based Jinshan Gold Mines (JINFF). CNGGC (Jinshan's majority shareholder) and Jinshan entered into a memorandum of understanding (a non-binding agreement) in December with the intentions of adopting the name China Gold International Resources Co. Ltd., becoming an international arm of China's core state gold mining and exploration operations.

Yesterday, shares of Jinshan hit 52-week highs after releasing news earlier this month of increased gold reserves at its Mongolian CSH 217 gold mine.

This article was originally published by Investinations on www.argmaur.com.