By Xiao Yu and Ron Harui
Nov. 14 (Bloomberg) -- China, the second-biggest overseas holder of U.S. Treasuries, should increase its bullion holding to diversify its reserves because the dollar may decline, the country's gold association said.
``China should have at least several thousand tons of gold in its reserves, five to six times the officially announced 600 tons,'' Hou Huimin, vice chairman of the China Gold Association said by phone from Beijing. The group represents producers, traders and retailers.
The U.S. budget deficit climbed to a record in October, and some investors are betting the dollar may weaken as the Treasury would need to sell more debt to finance its $700 billion financial-rescue package. Gold has tumbled 29 percent from its March record.
`` There's no doubt that gold would be attractive, as U.S. debt is likely to swell,'' said Kenichiro Ikezawa, who oversees about $3 billion as a fund manager at Daiwa SB Investments Ltd. in Tokyo. ``In the long term, both the dollar and Treasuries will probably weaken. It's possible that China will buy more gold, though the country is likely to do so gradually.''
The dollar dropped 0.5 percent against a basket of six major currencies at 3:25 p.m. Beijing time. Gold declined 0.8 percent to $730.54 an ounce.
China has the world's biggest foreign-exchange reserves at $1.9 trillion, according to data compiled by Bloomberg. It is also the largest overseas holder of Treasuries after Japan. China's demand for gold jumped 23 percent in 2007, making it the world's second-largest consumer.
The Asian nation may buy more gold for its reserves on concern the $700 billion U.S. bank bailout will cause declines in the dollar and Treasuries, the Standard newspaper in Hong Kong reported today, citing an unidentified person.
The People's Bank of China spokesman in Beijing declined to comment on the newspaper report.
Zijin Mining Group Co., China's largest gold producer, and rivals Shandong Gold Mining Co. and Zhongjin Gold Corp. jumped by their daily limit of 10 percent in Shanghai trading.
Zijin rose to 3.87 yuan at the 3 p.m. close, the highest in a month. Shandong Gold gained to 38.13 yuan, and Zhongjin Gold climbed to 29.34 yuan.
``Chinese gold stocks are probably rising on the speculation that China may buy more bullion,'' said Wayne Fung, a Hong Kong-based analyst at China Everbright Securities Ltd. ``It won't surprise me if China goes ahead as it's not the first time the rumor has emerged in the market.''
Some Asian central banks may seek to build up gold holdings a little as the percentage in their reserves is rather low, said Dominic Schnider, commodities analyst at UBS Wealth Management Research. ``But I don't think they will go into the market and destroy the balance and push it to ridiculous prices,'' he said.
Gold more than doubled in the past six years and reached a record $1,032.70 an ounce March 17 as the dollar slumped and oil advanced, increasing concern inflation would accelerate. In the past eight months, the precious metal has plunged about 30 percent as the dollar rallied, oil collapsed and the global credit crisis pushed the world toward a recession.
The U.S. dollar index advanced to a 30-month high yesterday.
``The dollar has gone up and gold come down so if you want to diversify it's a decent time to do so,'' Larry Kantor, head of research at Barclays Capital, said in Singapore. If countries want to shift into gold from currencies, ``they will do it over a very long period.''
The U.S. budget deficit climbed to an all-time high of $237.2 billion in October, spurred by the purchase of stakes in some of the nation's largest banks, according to Treasury Department data released yesterday in Washington.
The Treasury this month said it will more than triple its planned debt sales this quarter to help finance this year's budget shortfall. The government needs to raise money not only for the package, but also to pay for its bailouts of mortgage companies Fannie Mae and Freddie Mac.