Gold prices got a boost last week when China's central bank governor said the country would diversify some of its US$1 trillion (HK$7.8 trillion) reserves away from the US dollar. He later refused to specify if gold - which currently makes up a tiny fraction of China's reserves - was on the list.

Rallying gold prices have made the precious metal popular among individual investors, who are not legally allowed to trade on the Shanghai Gold Exchange.

"Some investment money from retail investors is entering the domestic gold exchange through some channels," said a gold trader at a major producer in Shanghai. "They want to join the market on speculation that gold is set to reach at least US$700 an ounce by the end of the year."

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Some mainland traders expect gold to reach US$800 to US$1,000 an ounce if the current rally helps the metal to break above US$680 an ounce.

China needs to add gold holdings into its reserve portfolio, but the increase could be smaller than the market has estimated, gold traders also said. Mainland gold reserves are estimated at 600 tonnes.

"The percentage [of gold holdings to the foreign assets] would not be higher than 3 percent," one trader said.

Some analysts have said Beijing's gold reserves could rise to around 5 percent over the next 10-15 years, raising their value to around US$50 billion from US$12 billion presently.

REUTERS