By Sreekumar Raghavan
China has now become a decisive factor not only in industrial metals but also precious metals. It is all set to over take India in Gold consumption. China’s gold consumption in 2009 has now been estimated at 450 tonnes,according to latest available data. This exceeds estimates for India’s net consumption last year, which is forecast at around 380 tonnes, according to the Bombay Bullion Association. Due to soaring gold prices, demand for gold in India plummetted while that of China rose 13.5% in 2009.

But there are two other factors may cause China to raise gold prices. Vronsky in Gold-eagle.com points out that seventy percent of China's $2,273 bn foreign reserves is denominated in US Dollar.

He points out that "unfortunately, the People's Bank of China did not have the foresight to diversify its mounting foreign reserves into other currencies like the Euro, Yen and gold." At present China has only 1.5% of its foreign reserves in gold while the rest is in US greenbacks which is subjected to vagaries of the market.

Vronsky has also made the following conclusions:
The world's total existing above ground gold is only 166,000 tonnes
The world's total yearly mine production is only about 2,500 tonnes
China's gold deficit represents 27% of the total existing above ground gold (166,000). Furthermore, if China were to buy up all newly mined gold in the world, it would take 18 years to accumulate 44,619 tonnes.

US tariff war with China.
USA has added additional duties on import of Chinese Steel products. Last time USA hiked tariffs against Chinese pipe imports, Jeff Nielson in Seeking Alpha warned in September that the US action could be bullish for gold. At that time gold had managed to smash through the $1000 resistance levels, he writes. The present hike in Chinese steel products tariff could lead to a retaliatory action from China forcing them to dump dollars in favour of gold.

However, Jeff Nielson notes that there are two, very good reasons why it is highly unlikely that China would engage in a standard “trade war” with the U.S. – where one country initiates duties/tariffs, and then the trading partner affected by those tariffs retaliates with tariffs against the first country. First of all, with the U.S. economy so much more fragile than the Chinese economy, and with a standard trade-war always harming both countries, China does not want to engage in actions which could cause this 'Titanic' economy to immediately sink to the bottom of the ocean.

This would result in harm to China through both a total collapse in its exports to the U.S. and a total collapse in the U.S. dollar – which would Lead to $100's of billions in losses on its U.S. dollar holdings. Of course, the impact to the U.S. would be many times more severe, but China is much more interested in the stable growth of its own economy than merely scoring “points” in a trade war.

The other reason why China is unlikely to engage in a tariff-for-tariff strategy is because the U.S. exports so little to China that there are not a lot of “targets” to focus on. Instead, China is much more likely to engage in subtle/indirect counterattacks against the U.S. Pushing up the price of Gold and Silver is one form of such indirect attacks – since the rising price of gold and silver is essentially a vote of non-confidence in the U.S. dollar, and undermines its status as “reserve currency”

For precious metals investors, a “byproduct” of this U.S./China spat should be an acceleration in the advance of gold and silver. This is a very good reason why precious metals investors should closely follow this simmering trade-war between the U.S. and China. Along with China, precious metals investors will also be “winners” in this war, Jeff Nielson said in his column.

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