Good Morning,Just one day after letting it be known that it has no intentions of disgorging its dollar or euro foreign exchange reserve holdings, the Chinese State Administration for Foreign Exchange said that gold cannot be considered as a mainstream investment vehicle for its reserves. The reasons? The same ones we have often attempted to cite in these very columns: a small market, limited availability of large amounts, liquidity problems related to sizeable amounts.

Marketwatch relays it as follows: SAFE also said gold bullion won't make a big portion of it forex reserves in future because supply is limited and bullion doesn't have a very good track record on a risk-to-reward basis over the past 30 years.Gold has an inflation protection feature, but many other assets have this feature, the group said.

Of course, when we did mention such minor 'details' -based on direct conversations with credible [local] sources- they were met with e-mailed howls (and worse) of incredulity and accusation of China playing poker. Does any of this imply that China will not keep adding some gold to reserves (provided they continue to grow)? Not at all; just not at the time, price, and in the amounts being virtually dictated by Internet forums and by agenda-driven hard-money zealots. Without mincing words, China basically said that the 'nuclear option' (dollar out/ gold in) is right o  u  t.  

The Chinese S.A.F.E. feels...unsafe placing a significant portion of its nearly 2.5 trillion dollars into an asset that would a) go much higher in value once China is seen as a buyer of large tonnage and b) getting stuck with such huge amounts would place the agency -indeed the country-into an illiquid position, should it ever need to dispose of portions of such holdings. Fiat or not, currencies remain the asset of choice (with gold a modest amount) for Chinese reserves allocation and management.Here is something that is possibly 'bigger' news than the Chinese agency's reluctance to load up on too much of a good thing: the fact that those (and others) central banks that did increase their gold reserves did so for perhaps a far more practical reason that gold bugs had conjectured last year. Recall that much noise was made about how central banks (previously the gold market's putative top public enemy) had turned into net buyers and were now seen as becoming bedfellows to the 'man-in-the-street.'

Well, it turns out that recent central bank gold buyers took that newly acquired shiny stuff and...promptly raised cash with it, by 'pawning' it with the Bank for International Settlements. The upshot? They were able to raise some $14 billion (that's against 349 tonnes of the yellow metal!) in sorely needed cash with the stash. Since December! Such swaps might yet place the entire gold-buying spree among central banks in 2009 in a different light. Not that the motivation is abnormal.

Consider: Gold is a very effective means of raising cash. Gold was trading at record levels. Cash was (and is still) needed. A swap with the BIS allows one to raise said cash and buy the bullion back later (presumably when prices subside). Of course, no one know what happens if the BIS decides to liquidate such collateral on the open market-if the need arises due to a sovereign default.

A staggering (by swap standards) 32 tonnes of bullion was pledged with the BIS in April alone. Such a swap would indeed be the largest on record. Observers have not named suspects but even India (the recent taker of 200 tonnes of IMF gold) was not off the list. In so many words, the gold bars that were supposed to have been taken off the market (perhaps for good) and gather dust in the basement, are instead gathering dollars from the BIS.

The goes as far as characterizing the swaps as a 'dumping' of gold by various central banks. Standard Bank (SA) analysts use a bit milder tone in reporting the development, however, they too note that: the data from the BIS which suggest some European central banks are raising cash via gold swaps, combined with a rising Euribor and Italy who have to roll substantial amount of debt between August and November is cause for concern.  In all, not the best of timing for such news, given that the World Gold Council has just sent out a hefty-sized report on the wisdom of...central bank gold buying. To more than 800 central bankers. Who might get ideas...

None of this stopped commodity guru Jim Rogers for (once again) issuing a clarion call to sell, sell, sell and buy, buy, buy. Buy what? Rice and other underpriced agricultural commodities mainly, and silver. And gold, which will - in his opinion, and without saying when- go to $2K per ounce. Sell what? Bonds, of course. Anything debt-related. What a shocker.

Meanwhile, in overnight dealings, the yellow metal touched price levels of near $1184.00 per ounce in a continuation of its decline to new fresh six-week lows. The aforementioned Chinese policy statement contributed to the slippage in price but the hope was there that physical bargain hunters would step in and lend some support to the metal especially as relative strength indicators point to oversold conditions for the first time in nearly four months.

Also after nearly four months from a post WWII peak of nearly 9%, the unemployment levels in the OECD countries are showing further signs of improvement. Job creation remains a difficult challenge albeit emerging market economies are doing their share in leading the recovery in the global economy. Nearly 17 million jobs were eliminated in the relatively brief 2007-2010 period as the global recession unfolded with a vengeance that harked back to the 1973 oil crisis, said the OECD this morning.

Growth-related apprehensions are not absent from the market however. Not by a long-shot. The US stock index futures niche showed a potential dip in the making for the midweek session. This, as nervousness about Chinese and US economic strength continued to plague investment sentiment. Tuesday's letdown came from ISM non-manufacturing data.

Elliott Wave guru Robert Prechter opines that the stock market faces its biggest potential decline in 300 years (someone in our archives lost all records going back more than a century, thus we cannot give you a sensible point of reference as to what such a drop might mean...). The US dollar continued to receive safe-haven bids in the wake of the ISM data, and stocks looked set for a wobbly start today. The euro eased back to under $1.26 albeit regional economic growth came in at 0.2% for Q1 -a 0.10 percent improvement from the final quarter of 2009.

Spot metals dealings opened Wednesday's session with...more losses. This time, the selling was not limited to gold however. Silver and the noble metals also declined as the trading day got underway. Spot gold started off with a $6.50 per ounce loss, quoted at $1187.60 while silver fell 17 cents to $17.67 the ounce. Platinum lost $12 and palladium dropped $2 - the former quoted at $1501.00 and the latter at $434.00 per ounce. Rhodium was stable at $2400 after having shed $30 in the previous session.As oversold conditions could attract fresh buyers, caution is advisable for the bears. Nevertheless, the formation of a bearish 'double-top' reversal pattern and the violation of a 5-month long uptrend will have the NYMEX bulls competing with those in Pamplona, Spain for being...on the run at the moment. Hopefully, no one gets gored in either place...?Happy Trading.  Jon Nadler      Senior Analyst, Kitco Metals Inc.North America                 US & Canada Toll Free: 1 (877) 839-8036 Websites: and         Blog: