In a move that the gold market did not anticipate, the IMF sold 200 tons of gold directly to India’s central. It was widely known–commented on on this blog February 12, 2008–that the IMF would be a gold seller.
Several years ago, the IMF let known its intentions to sell 400 tons of gold and announced that the sale would be in compliance with the Central Bank Gold Agreement (CBGA) so as not to disrupt the market. Instead of selling under the CBGA, the IMF sold directly to the Reserve Bank of India.
Some analysts are saying that they are surprised that the buyer was India and not China. Actually, I think they hoped that China would be a buyer as the IMF sold under the CBGA. Neither China nor India gave any indications of dealing directly with the IMF.
Now, gold market analysts are speculating that China will take the remaining 200 tons. And, it is pure speculation because no analysts have pipelines to the decidafiers at the People’s Bank of China, as China’s central bank is known. More important, though, a major precedent has been set.
The argument against central banks buying gold has been that the central banks would be cutting their own throats. Since they are major holders of dollars, any purchases of gold would be attacks on the dollar because dollars would be eschewed in favor of gold. Now, the Reserve Bank of India has set a precedent: it is acceptable for central banks to convert large quantities of dollars into gold. Who will be next?
Possibly China, but why not Taiwan or Japan, both major holders of dollars.
I have no doubts but that the bullion houses that are short huge quantities of gold on the COMEX, as discussed in Gene Arnsberg’s latest Got Gold Report, were counting on the IMF sales being dampers on the price of gold. As I speculated in my September 12 post, sometimes the big boys are on the wrong side of the market.
This remains a major bull market for gold and silver. Investors already with big positions have the luxury of waiting on price dips to buy. Investors who have not yet entered the market should consider biting the bullet and entering at these levels. The major news about gold is to be bullish, and there is no way of putting a top on this move.
Imagine if the Chinese pull the trigger on buying $80 billion in gold, one year’s total production. They would have only $2 trillion in US Fed notes after that.