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Not necessarily is the answer given by Campbell R. Harvey, professor at Duke University 's Fuqua School of Business and Claude B.Erb, Managing Director at First Chicago NBD Investment Management Company.

09 Oct 2012

Commodity Online
China is having the fifth largest gold reserves in the world. At about 1.7% of its total foreign exchange reserves of $3.3 trillion, the 33.9 mn ounces of gold that it owns compares in a pale fashion to 75.4% of US and 72.3% of Germany.

The question here is should China be buying more gold?

Not necessarily is the answer given by Campbell R. Harvey, professor at Duke University 's Fuqua School of Business and Claude B.Erb, Managing Director at First Chicago NBD Investment Management Company.

Gold as an asset may be an inflation hedge in the long term, but not in the short term, their research paper Golden Dilemma updated in September this year says. 

They point out that gold becomes useful in the event of hyperinflation; but despite the QE drives the global inflation is not driven to these levels. According to the paper, it is a “good bet” that QE3 will not result in inflation in short-term even as the price of gold would rise.

China's gold buying potential

“In 1995, if 100% of China’s foreign exchange reserves had been invested in gold China would have owned about 6,000 tons of gold. Using the same sort of hypothetical framework, China’s current foreign currency reserves would “buy” about 66,000 tons of gold. This would represent about one‐third of the total above ground stock of gold.” the paper said.

“China’s estimated central bank gold holdings are currently over 1,000 metric tons. There is no reason to believe that Chinese central bank gold holdings are more accurately reported than any other Chinese government statistic. Even though China’s gold holdings have risen sharply over the last few years, China holds less gold than the SPDR ETF. China’s gold holdings may still be rising.” the paper added.

But given the growth that China is experiencing, the nation may not be able to spend on gold reserves beyond a point, and it made sense for the country. 

Harvey's view

Meanwhile China Daily quoting Harvey said that, the Chinese apparently has faith in the way that its trading partners managed their economic affairs. China has every reason to question the strength of Euro or Dollar as the economic malaise in the respective countries of currencies aggravate. However, buying gold may not be the only option, Harvey said.

It may be even hard to accuse a connection between a nation's gold reserves and its health of economy as per Harvey. US and Germany may have huge reserves of gold, but the economies there too witness substantial fluctuation in currency rates and inflation.

At the end of the day, sound economic polices may be the ultimate tool in the hand of policy makers to arrest inflation and could not possibly be hard assets.

"Gold might be a barometer of failed economic policies. Investing in barometers is not theanswer; responsible economic policies are." Harvey said.


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