China to Buy More Gold

China's foreign exchange reserves currently stand at $3 trillion and gold as a percentage of these reserves forms only a miniscule 1.8%. But this dependence on the dollar is gradually coming down. "Countries like China who are amongst the largest holders of US dollars are, in fact, diversifying away from the dollar by selling dollar and buying gold.

Currently, 1.8% of China's forex reserves is in gold; if China were to bring this percentage in line with the global average of 11%, it would have to buy another 6,000 tons of gold, or more than two years' global mine production of gold." Imagine what that would do to the price of gold. This is also true of other major holders of foreign exchange reserves like Japan as well as India. Japan's gold reserves stand at a miniscule 3.2% of its total foreign exchange reserves of $1.14 trillion. India's gold reserves at 8.2% are much closer to the world average of 11%.
The rise in the price of gold has shown an almost one-to-one correlation with the rise in incomes in China and India. While Indians have been traditional buyers of gold, the Chinese have been fast catching up.

India and China continued to provide the bulk of the demand as they contributed to more than 1/3rd of the entire demand in the first quarter primarily on account of rising inflation. Another key statistic which came out was that the annual gold demand in 2010 from China crossed the 700-tonne mark for the first time.

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