The International Monetary Fund has approved a sale of 403 metric tonnes of gold reserves, in a move likely to raise $13bn (£8bn) of cash to replenish its coffers for lending to low-income countries hit by the global economic downturn. The sale amounts to roughly an eighth of the institution's stockpile of the precious metal and comes as gold prices hit record highs, boosted by investors seeking safety away from volatile stockmarkets.This is a well timed announcement, and would have brought the price of gold down in usual circumstances. But these are not usual circumstances.
China is thinking of buying from the IMF. Given the 2.2 trillion of the increasingly value-losing dollar reserve, China needs a hedge or a way out. They say they'll only buy at a big discount, but it's not a big deal: the $13 bn this will generate for the IMF will not do much to diversify the reserves. Given the $10-15 billion in gold traded per day, they wouldn't be able to get a lot of gold out from the real markets even if they wanted, and that would really drive up prices. China's diversification strategy includes commodities of all sorts - they have stockpiled everything from iron ore to aluminium and copper. Still, nothing that can make a serious dent on the $2.2 trillion they hold.
India might also pitch in - and try to buy a part of this to keep the $280bn of reserves in gold (only $10 bn is currently in gold).
What this will do is temporarily set up a floor price on gold, as a good friend told me yesterday. Gold just crossed $1000 an ounce, and in India trades at 1600 rupees a gram (though Goldbees, the ETF, trades at 1575).
The total amount of gold ever mined is the order of 150K tonnes. That at $1000 an ounces is about $4.5 trillion. To give you context, the amount of money in print in just the US is about $8.3 trillion. It's unlikely that this precious metal will be able to hedge dollar exposure very much, but you can bet that some countries are going to give it a shot.
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>That was a very well timed piece Deepak, thanks. It's also a pleasure to see that you are finding the time to post regularly, something we all have been missing for a while now. On the topic of gold, there seems to be some disconnect somewhere don't you think? If leading economic indicators are not WTF, then the world is stabilizing and gold should be coming down, right? Or is it that the dollar devaluation is a certain from here on which is causing this spurt in gold? From the numbers you mention, looks like gold is going to go upto 20k INR per 10gm if not more?
Arpan
09.21.09 at 6:29 PM
>I soo wish the IMF sold all this gold in the open market.. Always good to hold real stuff in these times rather than some paper money / stocks (which have gone up a LOT because of cheap money)
09.22.09 at 4:15 AM