GOLD ANALYSIS

Will she won't she? - China's gold dance

First the rumours are that China won't buy the IMF gold, then there are equally strong rumours that it will. If China or India, the other rumoured buyer, don't cough up does it really matter?

Author: Lawrence Williams
Posted: Thursday , 25 Feb 2010

LONDON - 

No sooner had most Western pundits come to the conclusion that China was unlikely to buy the IMF's  remaining 191.3 tonnes of gold for sale, with reports in China Daily lending support to this interpretation of Chinese buying policy, than the Russians in the form of Pravda published an article saying that China was in talks with the IMF to relieve that august body of this bullion which is obviously burning a hole in its pockets.

The Pravda report quoted the FinMarket news agency as saying that Chinese officials have confirmed the nation will buy the IMF gold - this immediately follows reports from other Chinese officials that it won't buy the IMF gold.  Naturally the gold price has been bouncing up and down like a yoyo.  Either the Chinese are having a huge laugh at the expense of gullible Western - and other Asian - investors, or there are groups of gold bulls and bears out there busy placing stories in the media to suit their particular investment policies.

Indeed the supposed source of the China will buy IMF gold story says, according to a Reuters report, that she didn't actually have any direct official confirmation of the story relying on Chinese news reports - which may well have just picked up on earlier Western speculation on the matter - news just going round in circles!

Naturally the IMF refuses to confirm, or deny, any of these stories - it's not in the business, officially at least, in promoting any specific purchasing agenda.

In point of fact, what does seem to be apparent in the gold market is there is insufficient traction at the moment to drive the gold price much above $1120 and there is substantial buying support below the $1100 level.  The gold market has probably also been affected by low volumes in China because of the Chinese New Year holiday and may pick up a little more next week.

What should be borne in mind, though, is if the IMF does release its gold in an orderly fashion on the open market in some form or other - probably a series of limited volume auctions - the gold price should be able to ride this without much trouble.  After all no other Central Banks seem keen to sell (sales so far from this source this year have been a measly 1.6 tonnes) and over the past ten years gold has risen dramatically despite Central Bank sales at much higher levels than the IMF is proposing.

So what's the answer?  Probably sit tight on your gold - the downside looks to be limited by investors coming in when the price drops below $1100.  If one of the rumoured major buyers does come in - either India or China - and snaffles the lot then there will be a good kicker in the price.  If they don't, with the limited downside gold may well help you retain your wealth far better than the increasingly fickle and nervous stock and commodity markets.