China Headlines:
China’s Central Bank Says Inflation a Priority

Never yet seen anyone ‘cure’ inflation without increasing their output gap (recession)

China 2010 Gold Output May Be More Than 340 Tons

And at current prices, I’d guess it isn’t safe to walk the streets with gold in your teeth.

The way markets work is that price increases continuously adjust the market cap (total available gold x the price) to indifference levels.

If we’ve reached those indifference levels and the higher prices are brining out new supply (with a lag) the result is a downward adjustment.

And at least part of that demand came from misguided notions of qe2 which are gradually reversing.

China Expanded About 10% in 2010, Vice Premier Says

A deceleration that hasn’t yet cured their (political) inflation problem.

China’s Money Rate Poised for Biggest Weekly Drop Since 2007
China to Crack Down on ‘Hot Money’ Inflows, SAFE Says

And they remain torn between the desire of their exporters for a weaker and low domestic wages, and the political necessity for lower ‘inflation’ which they think might come from a stronger currency.

In any case the domestic inflation works to weaken the currency longer term, so it may prove moot.