People’s Bank of China Positive on Gold due to ‘Value Preservation’; Concerned About Euro, Dollar and Paper Currencies

(March 25th, 2011) -  Gold and silver remain supported by continuing macroeconomic and geopolitical uncertainty. Inflation, the European sovereign debt crisis, conflict in Libya and the wider Middle East and the nuclear disaster in Japan are all factors which will likely result in gold reaching new record nominal highs in all currencies sooner rather than later.

Gold and silver’s record highs yesterday were barely reported in the non-financial press and media yesterday which is another sign of the lack of animal spirits and popular participation in the bullion markets. One of many strong indications that gold and silver remain far from the speculative bubbles suggested by some.

The US dollar and Swiss franc are down 1% and 2.5% respectively so far on the week. While sterling and the yen have fallen nearly 2% against gold in the week so far.

People’s Bank of China Favors Gold Over Euro, Dollar and Paper Currency due to ‘Value Preservation’

The People’s Bank of China are very positive on gold in their just released annual Financial Markets Report. They remain concerned about risks posed to fiat currencies such as the dollar and euro, about asset price bubbles internationally and the risk competitive currency devaluations poses to fiat currencies.

The report is much more positive than last year when they appeared to talk down gold’s prospects somewhat. Skeptics suggested that this was in order to allow them to continue accumulating gold without the price running away from them.

The Chinese central bank said that inflation risks in economies internationally will support demand for gold, with prices for the precious metal likely to continue to make record highs.

While the risks of falling gold prices shouldn’t be ignored, political conflict is likely to support higher gold prices.

Inflation risks mean demand for gold will remain strong and investment demand from a ‘value preservation’ angle will be very strong supporting gold at higher levels.

It said it is considering allowing more foreign financial institutions and companies to participate in China’s interbank bond market, beyond international development agencies, and it is studying gradually opening the country’s gold and futures markets to overseas yuan holders.

The Chinese are clearly attempting to position their central bank, the PBOC, as a powerful rival to the Federal Reserve and their yuan/ renminbi as an alternate reserve currency.

Senior and influential Chinese policy makers, bankers and government officials have clearly stated why they see gold as an important currency reserve and monetary asset. The PBOC and possibly SAFE are likely to be buying all dips aggressively and providing significant demand and massive support to the gold (and possibly even the silver) market.

The record demand for gold as a store of value from the Chinese people is being emulated by their increasingly powerful central bank and other financial institutions which is another bullish factor for gold.