China's central bank could soon take advantage of the price correction at the gold market to increase its gold reserves. According to a statement by a senior representative of the People's Bank of China (PBC), the bank will continue to diversify away from the US dollar.
PBC analyst Zhang Jianhua stated that the PBC should take advantage of the current price correction in gold to add to its reserves. This was a necessary move in order to diversify its $3.2 trillion foreign currency holdings. The PBC currently holds 33.9 million troy ounces of gold. In recent months, markets have been speculating as to when the PBC would start buying gold again. China's central bank has not made any market purchases since April 2009, a decision that experts believe was based on the strong price rally in the yellow metal over the last three years. China has instead been adding to its reserves by relying on gold production from mines in China.
In the past two years China's rapidly growing middle class has been increasingly buying physical precious metals such as gold and silver in order to protect their savings from growing inflation, which hit new highs at the end of the summer. Stricter credit controls and further measures by the PBC aimed at cooling down the Chinese economy have since cooled inflation – but at the expense of slowing growth and concerns about a “hard landing” for the Chinese real estate sector. But this has not curbed Chinese enthusiasm for buying precious metals. A number of experts believe that in the face of a slowing economy, the European sovereign debt crisis, and a bubble in China's housing market, the PBC will have to go back to lowering interest rates and reducing bank reserve requirements. This might provide another stimulus for the economy, but at the expense of further price rises.
Such measures would again stimulate inflation, which in turn would encourage more gold and silver purchases by China’s citizens. As long as governments continue to seek solution for global imbalances by restarting their printing presses, the run towards precious metals will continue.
