SHANGHAI (Interfax-China) -- While current international gold prices mainly track the dollar and crude oil prices, the possibility that China's central bank will increase gold reserves to hedge against dollar weakness, backed by the country's huge potential for demand growth, will cause Chinese factors to have increasing influence on gold prices.
What might provide fresh Chinese gold demand this year is the possibility China's central bank will increase its gold reserves to defend against the risk of a falling U.S. dollar, and could be a major factor on world markets.
By June 2006, China's gold reserves only stood at 600 tonnes and only accounted for 1.8% of China's total international reserves, compared with the U.S.'s percentage of 75.1%, Germany's 62.9% and France's 64.8%.
"As the world's fastest growing economy, China's gold reserves are at low level compared from that of 8,000 tonnes in US," Ghee Peh, head of UBS regional base metals and mining research said.
While there has been no official statement from the People's Bank of China (PBOC), China's central bank, PBOC governor Zhou Xiaochuan said in January that China has concrete plans to diversify its forex reserves and gold is definitely one of the candidates for the bank.
UBS anticipates the US dollar to be weakened by a potential interest rate reduction by the US Federal Reserve Board in the second quarter, that will stimulate gold price to stay bullish in 2007, Peh said.
In 2007, the average gold cash price is very likely at $680 an ounce, Peh said.
However, the bullish market in 2007 will be sustained by tighter gold supplies, says Wang Ruilei, analyst with Chengdu Gaosaier Gold & Silver Co. Ltd, a gold dealer under the Shanghai Gold Exchange.
"The market is worried major gold mine production will not see substantial growth over the next couple of years, as no new gold reserves have been discovered in the past few years while gold demand in terms of consumption and investment will continue grow firmly, especially in China, India, Japan and the U.S.," he said.
Gaosai'er predicts the average cash price for gold will be $650 an ounce in 2007.
Chinas' industrial consumption growth for gold should remain stable in 2007 while demand from the jewelry and investment is more promising on the back of growing numbers of wealthy following China's rapid economic growth.
Precious metal prices in Shanghai settled higher on mixed U.S. economic data released overnight.
The Au9995 gold on the Shanghai Gold Exchange closed the session RMB 0.64 ($0.082) higher at 163.27 ($21.04) per gram. The B70323 silver contract gained RMB 1 ($0.13), closing the day at RMB 3,772 ($486) per kilogram.
Turnover on China's commodity futures markets in January increased by 76.95% from the same period last year to RMB 1,997.3 billion ($257.38 billion), according to the China Futures Association.
Transaction volume increased 42.37% year-on-year to 40,752,592 lots of futures in the past month.
With total turnover of RMB 1.37 trillion ($175.95 billion), the Shanghai Futures Exchange (SFE) maintained its position as China's largest commodity exchange, followed by the Dalian Commodity Exchange and the Zhengzhou Commodity Exchange.
Currently there is no gold traded on the SFE, but the China Securities Regulator Commission that the development of gold futures would be a priority this year.
(c) Interfax-China 2007
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