China ‘Crazy’ Not to Increase Tiny Gold Reserves

Check your drawers for those old cufflinks and see if you still have Grandma’s old jewelry packed away in the basement because you may actually own more gold than China.

China holds just 1.6 percent of its currency reserves in gold, compared to 70 percent by the U.S. and a 66 percent allocation by Germany, according to Credit Suisse. The Bank of Japan holds just 2.5 percent in bullion, notes the firm.

“There are no safe big-cap currencies,” wrote Andrew Garthwaite, Credit Suisse’s head of global equity strategy in a note to clients. “The real gold price is still 34 percent off its all time high and the behavior of gold is not yet typical of a bubble.”

Garthwaite, who sits on the firm’s global strategy team, recommends buying gold stocks like Newmont Mining, noting that if China and Japan were to put just 10 percent of their reserves in gold, the “increase in demand for gold would be 3 ½ times annual mine production.”

Gold and the Gold SPDR Gold Trust rose today as stock indices bounced between gains and losses. Gold climbed 3 percent last week, bringing its 2010 gain to 11 percent as regular investors diversify away from Euro-denominated assets and look for shelter from volatile U.S. equity investments.

China’s miniscule allocation to gold right now is “crazy,” said Tim Seymour, founder of EmergingMoney.com and a ‘Fast Money’ trader. “There’s no reason for them to not increase those holdings.”

Speculation that China will buy more gold has been rampant this year, especially since India has been increasing its holdings. Chinese government officials have sought to dampen those rumors each time though. Investors are likely to find out that China has bought more gold well after the fact. With its more than $2 trillion in foreign currency reserves, China knows that any whisper it is buying gold could cause the price to surge and their costs to increase.

Despite a 26 percent jump in 12 months, many Wall Street strategists continue to recommend increasing gold investments, but none of them must count China’s State Administration of Foreign Exchange as clients.

“Given the ongoing European sovereign debt issues, is there any reason to believe gold is overvalued relative to those currencies?” wrote John Roque, WJB Capital Group managing director. “Since gold is a currency and not a commodity, gold’s bullish action merely reflects what paper currencies are not worth.”

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