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Home >> Business
UPDATED: 16:42, December 01, 2005
Asian central banks likely to increase gold reserves
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When hedge fund pushed gold price to a record high in 18 years, central banks of Asian countries including China are expected to further increase their gold reserves, according to International Finance News reports.

Russia, Argentina and South Africa have decided this month to increase their gold reserves, which reversed the selling trend in six years by world central banks, especially European ones.

It is only a question of time for Asian central banks to follow and buy in gold: they hold 2.6 trillion US dollars in foreign exchange reserves, and able to change more of them into gold as a hedge against US dollar falls.

The US dollar will inevitably slip further. Some budget deficits of the seven major industrial countries are at a record level, and central banks are "printing banknotes" to devalue their currencies. Huge amount of budget deficits and debts in Europe, America and Japan will finally force them to increase real interest rates in an effort to drag economies back to the right track. This means slower growth rate and lower prices of stock, bond and real estate as well as faster increase of inflation -- a golden opportunity for central banks to buy in gold.

Asian countries have good reasons to hold more gold. Compared with developed countries, their percentages of gold in foreign exchange reserves are apparently small. As the World Gold Council pointed out, Asian investors are the world largest gold consumers, but gold only takes 1.1 percent in China's official reserves, or 1.3 and 3.6 percent in Japan and India respectively. A sharp contrast is the American percentage of 63.8 percent, and over 50 percent in Germany, France and Italy respectively.

Due to fluctuations of major currencies, Asian countries may not choose to change their US dollars into euros. Meanwhile, they don't like holding too much dollars, so one of the way outs is simply to have more gold. Of courses, Asian countries need coordination in this regard, since action from a single country may trigger strong fluctuations of exchange rates and harm economic activities.

By People's Daily Online

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