By Greg Peel

Just when the gold price looked like it might fall into a seasonal hole, helped along by an easing of European sovereign fears, the metal has again found support largely through expectations of renewed quantitative easing (money printing) measures from the Fed and possibly renewed US government fiscal stimulus as well.

But also helping gold find renewed support has been an announcement this week that Beijing will be easing restrictions on Chinese gold trading.

China is now both the world's largest producer and consumer of gold – the latter driven by traditional jewellery demand during gift-giving festivals and the increased wealth of China's middle class in being able to afford gifts of gold. It's all about “face” and one-upmanship. Beijing recently created the Shanghai Gold Exchange but trading has been minimal largely due to the fact the trading of gold has been restricted in the banking sector to only the People's Bank of China.

There has been much speculation in recent years that China's central bank would significantly increase its relatively tiny sovereign gold holdings as a means of diversifying away from US bond holdings, but while Beijing has quietly soaked up a lot of local production it has not been spotted in the global market. Not even India's purchase of half the IMF's long-term selling order could arouse interest from the PBoC.

There has also been much anticipation of an inevitable currency revaluation from Beijing but aside from a widening of its peg range to the US dollar, the renminbi has not seen any significant appreciation. Beijing has instead followed a typical softly-softly path, much to the irritation of the US, if for no other reason than it does not want to be seen to be giving in meekly to pressure from Washington.

Yet Beijing would very much like to extract itself eventually from its dollar-peg given its concerns about the level of US government debt and its increasingly ominous trajectory. This puts the US dollar at risk, and China is the biggest foreign holder of US bonds. If the dollar goes, China's foreign reserves are devalued, which is one reason Beijing would never dump US bonds either and thereby shoot itself in the foot.

But if Beijing has appeared ambivalent about buying up any foreign bullion on offer, it's quite possibly because it does not want to be seen to be paying top dollar. Beijing is clearly sick and tired of having to fork out higher and higher prices for all commodities, so more recently it has stepped up its policy of buying into foreign mines and mining companies rather than just paying end-price margins on imports.

To date this this has meant encouraging state and non-state owned enterprises to pick off whatever it can across the planet, but suddenly gold has been singled out for special interest. Beijing has announced that it will “support” Chinese companies issuing bonds to finance gold mine and miner acquisitions. Just what that “support” exactly is is unclear, but commentators assume Beijing will back-door financial assistance specifically in the gold sector.

So China really is going after foreign gold, just not through the traditional channels. But there's little point in repatriating fresh gold production back to China if there exists no real market to accommodate it. To that end, Beijing announced this week it would ease restrictions on the import and export of gold by Chinese banks.

It is thus suggested the move will serve to ignite a more active Shanghai Gold Exchange and in so doing take another step towards the sort of financial market reform which Beijing has been implementing – albeit painfully slowly – as it moves from being a communist closed shop to a capitalist global economic superpower.

One might thus also assume that the freeing up of the domestic gold market is just another quiet step along the path of preparation for currency revaluation.

And while insiders dispute the move as a suggestion Beijing is looking to increase its gold reserves, the global market is still assuming recent developments in China can only put upward pressure on the price of gold.

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