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China is the 800lb Panda in the Gold Market

|Includes: GLD, PSLV, SLV, Wheaton Precious Metals Corp (WPM)

China is quietly dumping dollars for Gold, Silver,and industrial commodities.  China's official Gold reserve figure is 1,054 tonnes - an increase of over 75%, in a three-year period to 2009.  These are the reported reserves - Chinese reserves actually are at whatever the government is prepared to announce.  

China is buying all its own gold production, which not only includes mine production, but all the Gold it gets from buying Gold Dore from mines internationally. It is also the cheapest place to refine Gold, and this produces a huge output from custom refining that it purchases whenever it can. Also the byproduct gold from its huge base metals refining sector ends up in China's vaults. China will buy any Gold refined in China at a premium and without the further costs of secure international transport.  Only the Chinese government, knows how much refined gold is produced from these sources - but don't be surprised if later it turns out to be a large amount.

So China is moving annually over three hundred tons a year of locally mined Gold into its' Central Bank Vaults, perhaps more, plus much of the internationally sourced Gold produced by its' refining industry. It could easily have over 2,000 tonnes by the end of 2011.  The Chinese target by the way is 10,000 tonnes and I believe they will get there in the next  5  to 7 years.

The World Gold Council confirms much of this - ' China has been buying local gold mine production and the production of local refineries - whether that is by-product gold or recycled gold - for a number of years... They have been gradually building gold reserves, not by cashing in dollar assets which might upset the dollar market but they have been quietly doing it by buying local gold production'.

China recently removed all the barriers to Chinese National buying their own physical Gold and many see this as the next huge wave of savings in China as the Government has made it very difficult now to speculate in the property market.

Everything that China is doing with Gold it is also doing with Silver, historically Silver was the currency of China and many commentators think that the Chinese cultural connections to Silver will now reappear.

If you want to know why Gold and Silver supplies are tight and why prices will only go up in a ratchet-like manner, look no further than China.


Disclosure: I am long SLW.

Additional disclosure: I am long in physical Gold and Silver