Gold Breaks $1,100: Does It Matter?

Last week, gold prices briefly touched $1,100/oz before settling just under that number. Apparently the Indian government decided to sell US dollars and make a 200 ton gold purchase from the IMF, which created the spike in gold prices. Right now, the spot price for the yellow metal is $1,106.

The IMF still has another 203 tons of gold to sell and the hot favorite to make the purchase has been China. However, according to a report by Reuters, it's a lot cheaper for China to buy domestically mined gold than purchase bullion from the IMF at the current spot price. According to Li Yang, a former adviser to the People’s Bank, “China’s gold is much cheaper than that.”

You may not realize it, but China is the world’s No. 1 gold producer, and its mine costs are much less than $1,100 per ounce. And given China’s propensity to put national well-being over any private individual or firm, they’re likely to just pay for the gold being mined at cost, which would be a lot lower than the spot price.

According to another Chinese Central Bank official,

China is the world’s biggest gold producer, so there’s no urgency for us, as there is for India, to snap up big volumes whenever they come onto the global market. It’s cheaper for us to buy gold from the Chinese market, but it doesn’t help diversify our huge foreign exchange reserves.

To diversify our portfolio, we should spend dollars on things like gold. But the catch is that 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.

China has $2.27 trillion in reserves. Spending $25 billion a year buying gold is chump change. The question that’s relevant is whether they will, because that will put upward pressure on gold prices.

While no one knows whether China will or will not buying gold on the open market, the one thing we do know is that the monetary base of the US dollar is growing exponentially making each existing dollar less valuable. Check out this graph from the St. Louis Fed:

While it's not obvious from the graph, the monetary base has grown in the past year. It's true that this money hasn’t worked its way in to the economy, but if and when it does we should expect higher inflation and a spike in prices of real assets like gold, silver and real estate.

If I had a few trillion dollars, I’d be buying a few hundred tons of gold every year!

Comments

[USisCorrupt:]

Don't forget Silver. I expect to see a much greater percentage gain in silver vs gold. And always BUY the Physical Metals and stay away from the SCAM etf's such as the GLD & SLV aka toilet paper just like the US Dollar.

Nov 10 09:06 AM

[borisb:]

the favorable factors for Gold seem to be intensifying. While the US dollar reserves may remain high in China, India, etc... its unlikely they will allow the reserves to build up more in 2010 and beyond, so the new money coming in, duirng 2010, etc. will see more of it converted to hard assets such as Gold.

Nov 10 09:39 AM

[Roger Knights:]

Even if China only buys its domestic production, that indirectly boosts gold's price, by taking that one-time supply stream off the market.

"If I had a few trillion dollars, I’d be buying a few hundred tons of gold every year!"

It would have been rational for trillionaires to have done so years ago, but it's taken them awhile to take off their "barbarous relic" blinkers. Finally, the penny has dropped and they've got the point. From now on there will be deep-pockets buying support under the gold price, making it a much safer (less volatile) buy.

Nov 10 09:45 AM

[FDNY RET:]

If China buys it's domestic gold with those worth--less--every day U.S. dollars, then who will hold those dollars??. And what will they do with them.
At least the IMF can dump them into that bottomless pit of third world'rs who never pay them back anyway, so "why care"?

Nov 10 12:25 PM

[chris coonan:]

No.

Unless you own a bomb shelter, it is something you can put on the shelf to buy stuff with.

Nov 10 12:37 PM

[kohalakid:]

The statement by the Chinese official makes a lot of sense. Why should they buy gold with US dollars when they can buy domestically mined gold and pay for it with yuan they just cranked off the printing press? They can use the dollars to buy US businesses or real estate or commodity resources.


On Nov 10 12:25 PM FDNY RET wrote:

> If China buys it's domestic gold with those worth--less--every day
> U.S. dollars, then who will hold those dollars??. And what will they
> do with them.
> At least the IMF can dump them into that bottomless pit of third
> world'rs who never pay them back anyway, so "why care"?

Nov 10 01:01 PM