Why China wants to buy $93 billion worth of gold

BEIJING: Chinese investors beware! Don't get trapped in the glitter of gold. In China, investors have been rushing to gold following the crash of global markets.

But, the investment in gold is also riddled with risk and this is a critical time now where investors should be cautious with their gold investment.

According to analysts, gold can be a very good product for holding its value. But the risks for paper gold and gold futures are nearly 10 times bigger than real gold investment. Buying gold related stocks can also be a risky move.

"Gold is a very solid asset. Buying physical gold does have advantages compared with other investments. Investments in gold-backed financial products and paper gold should be left up to the professionals," says Mark Robinson, a bullion analyst based in Dubai.

According to Robinson, gold investment in China is starting to look like a crowded marketplace. It's being boosted by the rising prices and market demand. And the unpleasant performance of the US stock market, low expectations for the US dollar, as well as investors' concerns over the banking crisis have also pushed up people's need for gold.

Over the past 5 years, when gold investment was booming, more problems tended to appear in the market. Many investors have been hit really hard because they couldn't contain themselves, and continued to pour more money into it.

Meanwhile, China has nearly $2 trillion in surplus reserves. Beijing's piggy bank is overflowing with money. In fact, at nearly $2 trillion, China has the largest foreign reserves of any country in the history of the planet.

Whereas Washington now has nearly $11.4 trillion in debts, not counting the contingent liabilities of the real estate crisis.

With this case scenario, China's currency yuan should have more purchasing power. But that's not the case — the dollar remains stronger.

But, over the next few years China is essentially going to corner the world's gold market.

Beijing knows that the dollar's status as a reserve currency is soon going to be history. Just like the pound sterling lost its status as the world's reserve currency in the early 20th century.

And authorities in Beijing also believe that as China rapidly progresses toward superpower economic status, the yuan should be a world-class, stable medium of exchange.

They envision the yuan as a major international currency some day, with as much (or more) status than the US dollar. That's why they're going to back the yuan with gold.

Plus, there's another reason for Beijing to buy more gold as part of China's piggy bank. China has an estimated $1.3 trillion invested in dollar-denominated investments. They can't get out of the dollar quickly. It would destroy the US economy which would have a direct negative impact on China.

So the smart thing to do: Hedge and diversify existing dollar holdings with gold. China has a mere 0.9% of its reserves in gold (600 tonnes) now. That's the lowest of any industrialised economy. The US has 77.3% of its foreign reserves in gold.

Just to up its reserves to 5% in gold, Beijing would have to purchase $93 billion worth of bullion. That could easily send the yellow metal skyrocketing to more than $2,000 an ounce.