China will be prudent in buying gold: official

"The international gold market is very limited. If I purchase gold on a massive scale, it will definitely push up global gold prices," Yi said at a news conference on the sidelines of China's annual parliament.

"So, as for suggestions from many friends that we should increase gold holdings, we will give prudent consideration to this, according to market conditions."

Gold fell $3 in the hour after Yi spoke, later paring losses to reach $1,122 per ounce, as many market participants had already discounted the chances of a sudden gold spree by China.

Many investors have wondered whether China might buy 191.3 tonnes of gold being offered for sale by the International Monetary Fund, after India bought 200 tonnes in November.

"We have been saying that whilst it's clearly the case that it's sensible for China to buy some gold, we think it's more likely they'll be doing it quietly in the open market as opposed to taking a large chunk of the IMF gold," David Barclay, commodities analyst at Standard Chartered.

State media have reported the country is unlikely to do so, partly for fear of fuelling market speculation, and Barclay said he thought it was largely a question of price.

"If we have gold correct down below $1,000 then I think it's more likely, given that they've said prices below $1,000 are more reasonable and also it would be lower than the $1,045 level that India bought at. There is that rivalry between the two countries."

The Chinese government wowed the gold market last year by revealing it had increased its holdings of the metal to 1,054 tonnes from 600 tonnes in 2003. Buying the IMF gold might cause prices to spike, Barclay said.

"Prices haven't really corrected that much despite the drop in the euro, and we've seen investor positioning turn a bit more positive. It wouldn't take much, if China did come out, to really ignite the market, and I don't think that's something they want to do."

China's $2.4 trillion in foreign currency reserves and its relatively small gold holdings have fueled speculation the country is continuing to buy, although officials have insisted that any increases have come from domestically produced gold and the international price is too high.

"It is, in fact, impossible for gold to become a major investment channel for China's foreign exchange reserves. We have 1,000 tonnes now, and even if I double that holding, according to current prices, that would be about $30 billion," Yi said. "It would just increase the level of gold (in China's reserves) to about 2 percent from the current 1 percent."

Yi also said that, from a long-term investment perspective, gold was not the best play.

"Gold prices in recent years have risen very nicely, but if we look at the price over the last 30 years, gold prices moved in great swings," he said. "So as an investment, its yield is not very good from a 30-year point of view."

China is vying with India to be the world's top consumer of gold. It is already the top producer, with output of 313.98 tonnes last year, up by almost 50 percent in five years.

In January, China produced 21.81 tonnes, a rise of 8.1 percent from a year earlier, according to the Ministry of Industry and Information.

Reuters