Commodity Online
MUMBAI: By now, the whole world knows that China is buying gold like never before and the country has become one of the top holders of the yellow metal.

Even though it was obvious that China has been buying gold for the past few years, a clear picture was not available till last month when China came out with a statement on its gold holdings.

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At a time when China is stocking gold and other metals like copper, other countries also may be harbouring the same idea and may be doing the same.

Reports appearing in Indian and foreign media show that several central banks are showing interest in buying more gold.

If other central banks also begin to view the yellow metal as an important monetary asset, there could be change of sentiment for the gold market which has been languishing at around $900 an ounce of late.

For a market that is already feeling the pinch of slowing physical sales, purchases for sake of diversifying reserve assets in addition to return of investor interest should prove positive.

Adding to this sentiment is the fact that International Monetary Fund is planning to sell its 400 tonne gold. Among central banks, the IMF has the third largest holding of gold. The IMF sales as and when done are sure to augment physical supplies and depress prices.

Another big question is about European central bank sales of gold.

The agreement to sell 2,500 tonnes of gold (500 tonnes a year) over a five-year period will come to an end by September this year. Whether it will be extended and for what period, as also whether the quantum of sales will be modified are questions everyone is asking.

Purchases made by the Chinese State Administration for Foreign Exchange (SAFE) have been made over to the country’s central bank, the Peoples’ Bank of China (PBoC).

That gold has now been added to the monetary reserves is important because it indicates the extent to which gold is being rehabilitated as a monetary reserve asset, not only by the Chinese monetary authorities but also by central bankers around the world.

With rising investment demand over the past nine years, it was clear that gold was being restored as a more important part of the of the world’s financial system.

Currently, China’s foreign exchange reserves are about $1.9 trillion. The humungous reserves run the risk of currency market volatility potentially eroding the dollar value of the reserves.

It makes commercial sense for the country to diversify at least a small part of its reserves into a more solid asset such as gold.