Cited: MSNBC

It has been reported that China is on something of a gold buying binge of late and many in the commodities markets and outside of finance are wondering why. A recent report by the Hong Kong Census and Statistics Department found that China imports of gold in November increased considerably over those in October and for any month in recent memory.

Industry analysts say that China bought as much as 490 tons of gold in 2011, more than double the total it purchased in 2010. This is a huge increase and many analysts are wondering what is behind the purchases.

The People’s Bank of China, the central bank of China does not release exact details about its purchases of gold or other assets but it has been hinting of late that no asset is safe and therefore they seem to be hedging their portfolio from currency risk by purchasing the hard asset, gold. Market analysts and speculators who seek to profit from knowing that such a large player like China might be a big buyer of gold are all keeping a close eye on the market and the bull in this china shop for indications that their appetite may not be quelled as yet.

However, others will point out that there are many other factors that don’t add up insofar as the Chinese central bank buying so much gold. For one thing, they would never be so obvious about their intentions and thereby allowing others to profit from piggybacking on their buying spree.

The other thing working against the PBOC being a big gold buyer is that gold is an illiquid asset and from all indications, the central bank is badly in need of investments that pay real dividends and that are liquid in order to fund on-going operations at the central bank, in particular their purchases of foreign currency reserves.

The demand for foreign sources of gold (China is the world’s leading producer of gold) is said to be from private investors in the country. Domestic demand from jewelers is satisfied by domestically produced gold so the demand for outside sources is seen to be from private individuals. Many analysts believe that the rush to buy gold by these individuals could be because of their concern that inflation will increase and that overall economic activity in China is becoming unstable. So, they are looking to hedge their portfolios with the best hedge against these risks – gold.

My take:  

So it seems that the Chinese aren’t without their problems economically speaking. We have been made to fear all things Chinese and that soon this monster is going to take over everything. Perhaps not. And, perhaps the Chinese are finding that managing 1.3 billion people and a growing economy isn’t quite as simple as it seemed just a few short years ago.