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Gold Targets $1100 as Beijing Insider Says China Can't Buy Enough Gold

Commodities / Gold & Silver 2009 Nov 05, 2009 - 07:21 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF GOLD in wholesale 400-ounce form held steady Thursday morning in London as world stock markets slipped.

Trading near $1090 and €735 an ounce for US and Eurozone investors, gold was up 4.3% and 3.5% respectively for the week so far.


Crude oil crept back above $80 per barrel. The US Dollar slipped on the forex market as the European Central Bank and Bank of England kept their key interest rate on hold at record lows.

The Bank of England also expanded its quantitative easing "asset purchase program" by £25 billion, but only half as much as City forecasters guessed.

"The Fed signaled conditions under which they will raise rates," notes Walter de Wet at Standard Bank of Wednesday's no-change decision from Washington, "[but] these factors remain favorable to low rates for some time to come.

"This should benefit precious metals...Despite current resistance [in gold], we see the downside well protected and dips should still be bought."

Aiming to "boost asset prices and improve access to capital markets" with its extra quantitative easing, the Bank of England has already bought UK gilts equal to this year's new government debt – a record peacetime deficit worth 12% of GDP.

The British Pound leapt more than 1¢ on today's 14% extension of the scheme, however, hitting a 10-session high above $1.66.

Long-dated government gilts slipped, pulling market yields higher on Euro and US government debt.

The gold price in Sterling held within its tight 1% range of the last 48 hours, higher by 3.6% from Monday's start.

"The question now is who buys the rest of the IMF gold?" asks Bart Melek at the $375 billion BMO Capital Markets in a note to clients.

Following India's surprise 200-tonne purchase announced on Tuesday, "We suspect it may be China, other Asian countries, Russia or even India again," says Melek.

"They hold relatively little gold relative to their very large foreign exchange reserves, and may want to diversify away from US Dollars."

"China's gold is much cheaper" than IMF gold, however, notes Li Yang, a former member of the Chinese central bank's monetary policy committee, and now a senior researcher at the Chinese Academy of Social Sciences, speaking to Reuters.

The world No.1 producer since 2008, China is now also the world No.1 private gold consumer market.

"It's cheaper for us to buy gold from the Chinese market," agreed an un-named People's Bank official, "but it doesn't help diversify our huge foreign exchange reserves."

"Even if China bought half the world's annual gold supply, it would only cost a few tens of billions of dollars, which is tiny compared to China's huge reserves.

"Even if it's sold at a market price, we should still buy," counters Xia Bin, head of a key Beijing think tank advising the State Council cabinet, making plain that his was a personal view.

"India's okay with it, why shouldn't we be? What's the use for so many dollars, whose purchasing power is weakening anyway? With so many foreign reserves in hand, I think China should buy, without doubt."

Back in the London gold market today, "The metal has come straight up from 1043 over the last three days," notes market-maker Scotia Mocatta.

"As we are reaching fresh record highs in price there is no historical price resistance."

Spying what it calls "fund related buying and some good option buying, propping up the market," Swiss refiners and dealers MKS says that "[gold] investors are already beginning to price in the fears of inflation that have been hovering around the market for a while.

"With talk shifting to how to deal with the long-term repercussions of quantitative easing, it seems gold is gathering momentum to eventually move higher past the $1100 mark."

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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