China Will Push Gold Prices Higher by Investing Its Huge Currency Reserves

The gold market has been in the forefront of attention for several years. Awakening from it's twenty year slumber, gold prices have moved up significantly in the 2000's. Still, the price of this shiny metal has yet to exceed it's lofty highs of 1980. The fear of inflation, the commodities boom, scarcity of supply, and international upheaval have all had a positive effect on gold prices. However, the best is yet to come. There is still time to invest in gold to take advantage of the next dynamic price move.

Gold sits just above $600 an ounce in today's markets. This price is well below it's all time high of $875 and below this year's high of $732. While the for-mentioned reasons for gold's rise will still be applicable, there is a newer and much more powerful force that has the potential to drive the price of bullion to over $2,000 an ounce. That presence is a country that has amassed a surplus of over one trillion dollars in foreign currency reserves. That country is China. China continues to gobble up more and more of many commodities in their unprecedented march to become a global economic leader.

Now, they stand ready to accumulate another commodity; gold! China has a desperate need to reallocate it's growing mountain of reserves. They will need to diversify them into areas that can keep pace with inflation and provide stability. The U.S. dollar continues to fall in value. China's trade surplus is mostly in dollars. It is a certainty that China will be buying gold in the near future, and lots of it! One of the main reasons will be to back it's own currency, the yuan, with hard assets in the form of physical gold. Despite the many idiosyncrasies people associate with China, they have a solid plan for the future. And that strategy is to replace the dollar with the yuan as the world's currency of choice.

As China's economy continues to grow in size, it will proceed to pile up more excess reserves. Compare that mounting surplus with the nearly nine trillion dollar deficit the U.S. owes. And that doesn't include future social security and Medicare payments that are promised. Consider that the United States backs it's foreign reserves with over 8,100 tons of gold bullion. To date, China has only 600 tons of bullion reserves. In other words, the United States backs about 75% of its foreign reserves with gold and China's reserves are supported by less than 2%. It would appear they have a lot of buying to do if they are to replace the dollar by creating a stronger yuan.

How high can gold go? Easily, this metal will move to over $1,000 an ounce. It will likely test it's old price high of $875 for a short period. Once it gets past that 26 year old high, it will rocket to over $1,000. Then the market will cool off for a time as the yellow metal falls back down to earth to about $900. After this profit taking is over, it will swiftly regain new highs well above $1,000 an ounce. And over a period of a few years, it will eventually surpass $2,000. As gold becomes a highly accumulated commodity, the price could go parabolic as the last of the unbelievers pile into the metal at any cost. It is possible we could see the price go over $2,500 or even $3,000 before crashing back down to below $2,000 or $1500 an ounce. The commodity markets behave in this fashion on a regular basis. They explode to the upside, exhaust themselves and come crashing back down to reality.

This scenario is only an educated guess and the timetable for the move in gold is unpredictable. But the fact remains that China will be buying tons of the yellow metal by the ingots. They are likely buying on the Q.T. right now so that they can make purchases while the price is still fairly low. Another factor that might aid in the rise of gold is the fact that if it is adjusted for inflation in 1980 dollars, the price would be about $2,100 today. This commodity is undervalued in spite of it's recent rise.

Gold represents a good profit opportunity. The risk/reward ratio is quite favorable considering the longer term potential. The time to buy is now or in the very near future. There are several ways to buy an interest in gold. These include:

1) Gold Bullion. It can be bought in 1 and 10 ounce ingots. Since it is difficult to store the physical commodity, purchases should be limited to a few bars that can be safely stored. Gold coins could also be considered, but get some advice from a knowledgeable trader or firm.

2) The gold ETF is one of the best ways to take part in the rising price of this commodity. This is the street TRACKS Gold Shares that represent 1/10th of an ounce of pure gold. This symbol is GLD and it is bought in shares the same as buying a stock.

3) Another possibility is buying gold mutual funds. There are several funds that offer good returns on the rising price of the metal. A few of these would be the DWS Gold Fund (SCGDX) and Tocqueville Gold (TGLDX). There are many others in this arena.

4) Purchase stocks of individual companies. It would be best to stick to the larger names such as Newmont Mining, Barrick or Agnico Eagle. It is possible that some of the smaller companies could be forced out of business because of rising prices and hedging of reserves.

5) For the more speculative buyers, there is the $XAU. This is a gold index that tracks the prices of a handful of major gold stocks. Options can be bought on this index. Call options could be bought far out into the future to take advantage of the price rise. Unless you have experience trading options, do not blindly buy them hoping for the "big score."

6) Buy it directly on the future markets. For experienced traders only! You need a good amount of capital and nerves of steel to play in this arena. By far, choices 2 or 3, mentioned above, are the easiest ways to invest in gold.

There is much to consider when purchasing any investment in gold. This commodity is highly speculative and traded on exchanges throughout the world. The best course of action for those interested in gold would be to put 5-20% of ones assets into gold shares. Be prepared to hold your investment for at least one or two years or longer. If you do buy shares, do not be afraid to take some profits as the price rises. Many people will buy gold below $1,000 and hold it to $2,000. Then they will watch it fall back to $1,000 and miss the profit opportunity. That is human nature to some degree. So be prepared ahead of time. Plan to sell some of your stake as the price escalates and capture a profit. That is prudent trading where gold is concerned. This is a good time to prepare for the coming price surge as China invests it's stock-pile of cash.

Note: The author does not hold any gold shares or recommend any specific gold investments. The author may trade options on the $XAU from time to time. This article is for information only.