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Increasingly, the argument in favour of gold revolves around China. This marks a shift in thinking, given that India has long been recognized as the biggest consumer market for gold, while bold stimulus actions by the U.S. Federal Reserve – in particular, three rounds of quantitative easing – have been seen as the biggest monetary driver.

Sober Look (via Abnormal Returns) looked at Deutsche Bank's bullish case for gold, which highlighted China: The central government is now emphasizing gold as a currency and sees it as a source of economic security, a shift that should drive demand higher.

As well, the Wall Street Journal reported last week that China will now allow gold trading among banks, over-the-counter, as the country positions Shanghai as a major gold trading centre.

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"From a government perspective, gold is seen as currency, and the government is slowly rele asing the controls on currency. We expect the [gold] market will be opened up to more foreign banks," Jeremy East, global head of metals at Standard Chartered PLC, told the Journal.

But Deutsche Bank – which can see the price of gold rising above $2,200 (U.S.) an ounce in 2013 – makes an intriguing longer-term argument in its favour, which also places China at the centre: The bank expects the yuan to challenge the U.S. dollar as the world's reserve currency some time in the future – and to do that, China's central bank is going to have to ramp up its purchases of gold in a big way to bolster its reserves.

According to the latest statistics from the World Gold Council, the U.S. holds more than 8,100 tonnes of gold, representing 76.1 per cent of the country's reserves – making it by far the biggest holder in the world. China ranks sixth in terms of its official gold holdings – behind Germany, the International Monetary Fund, Italy and France – with over 1,000 tonnes, and representing just 1.7 per cent of its reserves.

If China is going to close the gap, at least it has an opportunity to do so on the cheap right now: Gold fell below $1,700 an ounce on Tuesday, hitting a four-week low and bringing its recent slide to 5.3 per cent over the past two months.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More


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