Will China Buy 203 Tons of Gold from IMF?


"…the higher gold prices rise, the less likely China will be interested in IMF gold…"

Where is China? That is the question several market analysts are asking after IMF sealed its deal with India to sell 200 tons of gold.

In fact, the market was expecting China to buy the IMF gold as the Communist country was desperate to diversify its reserves following the uncertainty over dollar after the recession.

When IMF declared that it would be selling its 403.3 tons of gold, most analysts thought China would be the first buyer to go for the IMF bullion.

However, India moved fast and snapped up the 200 tons of gold. Now, the question is who is the second buyer of the remaining over 203 tons of gold? Some analysts say China is still a contender. But many are still not sure whether China will go for the IMF gold. China is now the world's largest producer of gold, and could buy its own output. That would reduce its risk of exposure to the market prices that India had to pay.

As such, the higher gold prices rise, the less likely China will be interested in IMF gold and the less likely the remainder of the sales will be completed off-market in 2009–2010.

Nevertheless, given the reduced IMF overhang and continuing fiscal and monetary stimulus policies, the gold market may rise even without Chinese buying.

The analysts also wrote that the India sale is a sign that gold's near-term direction seems to be squarely in the hands of the central banks.

The view that central banks will be net buyers of gold is bolstered by dovish policy from the U.S. Federal Reserve, rising U.S. unemployment and the continuing commitment to economic stimulus by G20 finance ministers. All these factors suggest more U.S. dollar weakness and inflation risk in the longer-term, the analysts wrote. Their base-case forecast for gold in 2010 is US$1,000 an ounce.

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