FT reports that China now has almost doubled its holdings of gold since 2003.

“This is probably the most significant central bank announcement since the Central Bank of Russia announced at the LBMA gold conference in Johannesburg in 2005 that it wanted to hold 10 per cent of its foreign exchange reserves in gold,” said John Reade of UBS.

Hou Huimin, vice general secretary of the China Gold Association, said China should build its reserves to 5,000 tonnes.

“It’s not a matter of a few hundred, or 1,000 tonnes. China should hold more because of its new international status, and because of the financial crisis,” he said. “The financial crisis means the US dollar’s value is changing fast, and it may retreat from being the international reserve currency. If that happens, whoever holds gold will be at an advantage.”

We wonder whether China can add gold and still keep buying so much US debt in the face of declining surplus…

In a previous post we highlighted the fact that with payroll taxes substantially reduced, the social security administration will very soon have to begin selling some of it $2+ trillion holdings of US debt to meet social security benefit obligations.  The 2008 annual report of the Social Security Trustees says:

“The drawdown of Social Security and HI Trust Fund reserves and the general revenue transfers into SMI will result in mounting pressure on the Federal budget. In fact, pressure is already evident.

We are increasingly concerned about inaction on the financial challenges facing the Social Security and Medicare programs. The longer action is delayed, the greater will be the required adjustments, the larger the burden on future generations, and the more severe the detrimental economic impact on our nation.

The annual cost of Social Security benefits represented 4.3 percent of Gross Domestic Product (GDP) in 2007 and is projected to increase to 6.1 percent of GDP in 2035, and then decline to 5.8 percent of GDP by 2048 and remain at that level.”

This report does not have the CBO’s recently adjusted numbers taken into account.  A little math:  Assuming 4.3% of a 14 trillion GDP level implies that social security benefit obligations are around $600B per year. If (say) half that many treasuries ($300B) are sold to meet the obligations next year, that’s a potential problem as big as the possibility the one that China might reduce its purchases of US debt.

A chart of US debt owned by other countries shown in a seeking alpha article suggests that it might NOT be China that brings a new crisis. While China is shown as a major holder, it could be the UK and others, like Switzerland with East Europe exposure that might need to dump Treasuries for liquidity…

see http://seekingalpha.com/article/125442-three-possible-scenarios-for-the-u-s-economy