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By Melissa Pistilli-Exclusive to Silver Investing News

Most analysts have attributed the latest rally in precious metals prices to rising inflation concerns brought on by a weakening dollar.

What’s supporting these inflationary fears? At first the amount of paper money being pumped into the financial system by governments trying to prop up their flailing economies had many worried. Those worries were enough to encourage small rallies in gold and silver prices earlier this year.

However, there are those who aren’t so sure the mere expectation of potential inflation among a handful of speculative investors and safe-haven seekers is solely responsible for gold’s rise above the psychological $1000 level and silver’s steady hold above the equally important $16 level.

To explain gold and silver’s price movements as a reaction to inflationary concerns is not getting to the heart of the matter. Economic guru Alan Greenspan‘s recent explanation that gold’s move is “strictly a monetary phenomenon” gets closer to the truth.

Greenspan has said gold’s push over $1,000 an ounce is “an indication of a very early stage of an endeavor to move away from paper currencies.”

And who’s endeavoring to make such a move?

China, the largest foreign-owner of US government debt, fears it holdings may become totally worthless if the dollar fails and is turning to what Greenspan has called the “ultimate source of payment”: precious metals.

Gold and silver have long been recognized as tangible assets that offer a safe way to store value in inflationary environments like the one we’re bound to enter as the paper money supply increases and the dollar loses its value.

This is where China comes into play. The reality of impending inflation has China running to hard money assets, i.e. gold and silver.

The Chinese know what’s coming and now they’re warning their citizens to take action by urging them to buy physical gold and silver.

Some of you are probably already aware of the news reports that China’s largest state-owned broadcaster, Central Television, has been running news program spots that are really glorified infomercials telling the general public of the ease in which they can invest in precious metals.

Speaking specifically about silver, the announcer says “China has introduced its first ever investment opportunity for silver bullion. The bars are available in 500g, 1kg, 2kg and 5kg with a purity of 99.9 per cent. Figures show that gold was fifty times more expensive than silver in 2007, but now that figure has reached over seventy times. Analysts say that silver has been undervalued in recent years. They add that the metal is the right investment for individual investors and could be a good way to cash in.”

This push towards precious metals investment is significant and surprising when one considers that private ownership of gold in China was forbidden until very recently.

This year, the Chinese government abandoned its restrictions on precious metal investment and ownership. However, there are rumours that the export of silver has been banned and the government may be looking at banning gold exports next.

“Clearly, the government believes the country is strengthened if everyone who can holds some hard currency,” said Doug Hornig, editor at Casey Research.

The Chinese government itself has been aggressively increasing its own bullion holdings and there are reports that Hong Kong is taking its gold holdings from London depositories and repatriating them to its own facility supposedly located at the Hong Kong airport.

“That means the government is backing the promotion of Hong Kong to a more formidable status as a Swiss-style, regional trading hub for bullion, at the same time as it reduces London’s role as a key settlement and storage center,” said Hornig.

The government is also looking to persuade Asian central banks, commodity exchanges, refiners and ETF’s to move their bullion reserves to the new Hong Kong depository, he added.

China’s movement toward precious metals is seen by some as a way for the Chinese central bank to move away from the failing US dollar.

It’s a well known fact that China is growing increasingly concerned about the dollar and its global reserve currency status, especially since China owns a large portion of US debt. It’s suspected that China is moving out of US debt holdings and into a more reliable money-store: gold bullion.

Obviously, encouraging its citizens to invest in physical bullion doesn’t help China move wealth out of the US dollar, but it will offer the public protection if the economy is weakened further by a possible credit bubble collapse threatening the Chinese financial system.

“Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down,” said Chinese economic ambassador Cheng Siwei.

What impact will China’s actions have on the precious metals markets?

Many analysts feel that China will be careful not to create an over-stimulated bullion market, but the Asian nation is also anticipated to have a greater impact than the dollar on gold and silver movements over the medium to long-term.

China’s largest bank, the Industrial and Commercial Bank of China, is reportedly forming a precious metals department to oversee gold and silver investment demand in China.

“The country cannot afford to let precious metals prices fall substantially and thus alienate millions of its citizens who have been taking state advice to buy them,” says Mineweb’s Lawrence Williams.

As Williams points out, after aggressively investment in silver and gold to millions of its citizens, the Chinese government isn’t about to allow a situation where it might suffer a significant “loss of face” and China is definitely capable of insuring that doesn’t happen.

If Williams assessment is correct, we can expect the silver and gold markets to remain robust for quite sometime.

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