China will be prudent in buying gold

China will be prudent in adding gold to its official reserves, wary that any move to buy the precious metal would only serve to drive its price higher, the country's top foreign exchange manager said. Yi Gang, head of the State Administration of Foreign Exchange, said that while gold was "not a bad asset", it would never become a big part of China's overall investment portfolio.
"The international gold market is very limited. If I purchase gold on a massive scale, it will definitely push up global gold prices," Yi said at a news conference on the sidelines of China's annual parliament on Tuesday. "So, as for suggestions from many friends that we should increased gold holdings, we will give prudent consideration to this, according to market conditions."
Gold fell $3 in the hour after Yi spoke, later paring losses to reach $1,121 per ounce. The Chinese government wowed the gold market last year by revealing that it had increased its holdings of the metal to 1,054 tonnes from 600 tonnes in 2003.
China's $2.4 trillion in foreign currency reserves and its relatively small gold holdings have fuelled speculation that the country is continuing to buy, although officials have insisted that any increases have come from domestically produced gold and that the international price is too high. China is the world's biggest producer of gold.
"It is, in fact, impossible for gold to become a major investment channel for China's foreign exchange reserves. We have 1,000 tonnes now, and even if I double that holding, according to current prices, that would be about $30 billion," Yi said. "It would just increase the level of gold (in China's reserves) to about 2 percent from the current 1 percent."
Yi also said that, from a long-term investment perspective, gold was not the best play. "Gold prices in recent years have risen very nicely, but if we look at the price over the last 30 years, gold prices moved in great swings," he said. "So as an investment, its yield is not very good from a 30-year point of view." Many gold market participants are unconvinced, citing China's need to put its huge dollar reserves to good use and its proven appetite for gold.