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FRED
07-05-06, 10:29 AM
Raise gold holdings, China told (http://www.thestandard.com.hk/news_detail.asp?pp_cat=22&art_id=22112&sid=8690191&con_type=1)
July 04, 2006 (The Standard)

China should take advantage of any weakness in bullion prices to build up its official gold holdings as part of a strategy for diversifying its foreign exchange reserves, a senior government economist said Monday.

China should take advantage of any weakness in bullion prices to build up its official gold holdings as part of a strategy for diversifying its foreign exchange reserves, a senior government economist said Monday.

Xia Bin, head of the financial research institute of the Development Research Center, a think tank under the Cabinet, also proposed that Beijing allow the yuan to fluctuate within a wider range against the dollar.

"It is practical for China to increase its holdings of gold by choosing an appropriate time to buy, because compared with other big trading countries the percentage of gold in China's reserves is seriously low," Xia said in an article on his agency's Web site.

and...

UAE Central Bank set to enter the gold market (http://www.ameinfo.com/90460.html)
July 3, 2006 (AME Info FN)

The UAE Central Bank Governor this week gave his strongest hint yet that the emirates will shortly enter the gold market and also purchase euros as a diversification of the national currency reserves presently held in US dollars. With the US dollar ripe for devaluation this seems a timely initiative.

AntiSpin: The U.S. Congress and the Fed are not giving them much choice. The Fed on June 29th indicated with its apparent decision to "pause" after the June 29 rate hike that devaluation of the dollar will continue as part of the policy to keep the U.S. economy afloat. Dollar devaluation, targeting the Fed Funds rate below real all-goods inflation, and deficit spending have kept U.S. consumers buying and demand running the U.S. since 2000. If the U.S. economy goes into recession before these economic stimuli are removed, this leaves policy makers only one lever left to pull to keep the U.S. out of a U.S. 1930s style deflationary depression: another period of rate cuts and liquidity injection.

When gold was headed toward a 20 year low in 2001, central banks were pre-announcing gold sales, causing them to achieve the lowest price possible on the open market. Typically, a major seller who wants the best market price does not pre-announced their intention to sell. One can reasonably conclude that the purpose was for the central banks participating in these sales to drive the price of gold down. These were largely Western central banks with close political ties to the U.S., such as the Bank of England. One can speculate but never know their motivations. Conversely, now certain central banks are buyers they are announcing their intentions to buy, driving prices up, although as in the case of the sales, the rumor of these purchases are already priced into the market and the price does not move on the news. The central banks that are buying now represent governments that are not close allies of the West, and are either energy or cheap labor exporters.

With all of the economic stimulus still in place since the collapse of the 2000 equity bubble -- running massive fiscal and trade deficits and the dollar already devalued more than 30% against most currencies and more than 50% against gold -- close friends of the U.S. or not, central banks can be forgiven for diversifying out of dollars.