Over the last decade the price of gold has risen consistently and markedly in an ever increasingly steep manner, with the curve now almost parabolic.

This has tempted many to say that the end of the ‘gold bubble’ is nigh.

But this leaked cable sent from the US embassy in Beijing in April 2009 under the name of Picutta and posted on Wikileaks does suggest that China is buying gold with the intention of weakening the dollar’s reserve currency status and that gold prices will keep going up. (cables.mrkva.eu/cable.php?id=204405)


"China increases its gold reserves in order to kill two birds with one stone"

The China Radio International sponsored newspaper World News Journal (Shijie Xinwenbao)(04/28): "According to China's National Foreign Exchanges Administration China 's gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB."

But it’s not only China that is in the gold buying market. India is also seeing record demand [1] for the yellow metal that in itself is believed will push up the price of gold.

But if China is also buying up in an attempt to weaken the US then where is that price likely to go?

Also, what would happen if the scenario put forward by Zerohedge on pension fund managers and the like also getting the gold bug as a more defensive financial posture is required.

As the piece points out the amount of gold held in investment funds across the globe is pitifully small (possibly because there is no commission in it). And that even the smallest percentage increase in that holding will send the price of gold stratospheric.

Now here’s the fun part. Let’s say fund managers as a group realize that bonds, equities, and real estate have become poor or risky investments and so decide to increase their allocation to the gold market. If they doubled their exposure to gold and gold stocks – which would still represent only 0.6% of their total assets – it would amount to $93.3 billion in new purchases.

How much is that? The assets of GLD total $55.2 billion, so this amount of money is 1.7 times bigger than the largest gold ETF. SLV, the largest silver ETF, has net assets of $9.3 billion, a mere one-tenth of that extra allocation.’

But that’s just fund managers, as Zerohedge points out, what about the $18.7 trillion in insurance companies, the $3.8 trillion in sovereign wealth funds …. .

If these players get the gold bug then any price may be cheap!

[1] http://news.sky.com/home/business/article/16060963

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