By Devon Maylie
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--Gold isn't going to be China's main route to diversifying its reserves right now, comments Tuesday from the country's chief foreign-exchange regulator indicated, but that shouldn't be surprising for the market.
Gold is trading down after Yi Gang, speaking at a news conference during the National People's Congress, said "gold is not a bad asset, but currently a few factors limit our ability to increase foreign-exchange investment in gold."
A stronger U.S. dollar is also weighing on the precious metal which is trading at $1,116.95 a troy ounce on the spot market, down 0.6% from Monday's close.
Yi's comments suggested that China's future gold purchases will be limited.
"That gold is not and will not become China's primary route of diversification does not surprise us in the least," said UBS metals analyst Edel Tully. "There is no way that gold could perform such a role, as the total market is far too small. This is precisely the reason that China's reserves are mainly held in the most liquid global currencies."
Currently, China is the world's sixth largest official holder of the metal at 1,054 metric tons, data from the World Gold Council from the end of 2009 shows.
That accounts for 1.5% of the country's total reserve holdings, a small amount compared with the largest gold holder, the U.S., where gold holdings account for 68.7% of total reserves.
"There is no way gold could be a meaningful percentage enough to count," said Bache Commodities analyst Andy Smith. He said the comments will serve to "downgrade" market expectations that China buys large amounts from the market.
-By Devon Maylie, Dow Jones Newswires; +44 (0)20 7842 9483; firstname.lastname@example.org
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(END) Dow Jones Newswires
March 09, 2010 06:54 ET (11:54 GMT)