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Why China's Buying Gold

By , Contributing Writer, Money Morning •

With gold prices on track to log a 12th consecutive annual gain, China is beginning to take a fresh shine to the yellow metal.

Now China's buying gold in an attempt to play catch up with the United States and other influential nations, the London Bullion Market Association reports.

At a recent conference in Hong Kong, Chairman David Gornall told the association's conference, "When comparing China to the U.S., it would seem that in China, gold asset allocation can only go in one direction. The country has only 2% of its reserves in the form of gold compared with the U.S. at 75%."

Other developed countries, including Germany, Italy and France, maintain a gold reserve in excess of 70%. Meanwhile, China's share lags, data from the World Gold Council reveals, trailing at a paltry 2%.

Since 2009, The People's Bank of China has not disclosed any changes to its gold holdings. At that time, the bank noted its stash had risen by 76% to some 1,054 tons. Its cache is set to swell again as the country, facing an economic slowdown from a plethora of lethargic international markets, gets defensive.

The spike in gold imports to China, via Hong Kong, reveals new significant accumulations of the commodity. Chinese imports of the precious metal totaled 69.7 metric tons in September, a striking 22% increase from a year ago.

China's Gold Attraction

After peaking in September 2011, reaching a high of $1,921 an ounce, gold traded sideways for the next several months.

Of late, the yellow metal has regained its luster, propped up by central bank buying, safe haven investing, loose global monetary policies and the growing threat of inflation.

In the U.S., the latest round of quantitative easing, dubbed QE Forever, has weighed on the value of the dollar. With the greenback's worth eroding, and geopolitical fears heating up, savvy investors, including China, are taking a keen shine toward gold-a tangible investment vehicle that many deem safer than cash.

As China's plentiful portfolio of U.S. treasuries continues to deteriorate, gold has emerged as a perfect hedge.

What's more, with four more years of the Obama administration it looks like easy money policies will remain in the United States, and with the U.S. and Europe both facing certain fiscal uncertainty, the move to gold is expected to gain steam in the months ahead.

Others have noticed that China's buying gold. As global economies deal with mushrooming monetary difficulties, no ceiling deficits and waning growth, gold stands to benefit on many levels.

The precious metal's direction has definitely changed, with the trend sloping upwards. As worldwide markets continue to struggle, the outlook for gold is glowing brighter.

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