I don’t know how much faith to put in this report but if it is true, gold may about to make a move:

According to a report published in The Standard, Hongkong, the Chinese mainland is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold.

The newspaper, quoting official sources, said China is considering changing its asset allocations during the financial tsunami in order to build up gold reserves “in a big way.”

China’s fears that America’s $700 billion bailout plan may make the US budget deficit balloon to well over US$1 trillion this fiscal year.

The US government will fund the bailout by printing new money or issuing huge amounts of new debt, either of which will put severe pressure on the value of the greenback and on government bond yields.

If I were running the Chinese central bank, it’s what I would be doing. I have said many times that the first country to a gold standard wins the game. If we don’t do it, I suspect the Chinese will. If they do, they will almost automatically become the world reserve currency. There are problems with that for now because the Renminbi is not convertible, but that can be remedied quickly.

I am watching the gold market very closely looking for some kind of indication that it is ready to rally. It’s been stuck in a range but eventually it will break out one way or the other. Deflation or inflation? With Ben Bernanke at the helm of the Fed, I think the answer is inflation. I just don’t know when.