BEIJING: Two months after India’s Reserve Bank made big global news with the purchase of 200 tonnes of gold from the International Monetary Fund (IMF),
bullion traders are now waiting for the ‘golden’ news of 2010. The news in question: Will China buy the remaining 203 tonnes of gold from IMF soon?
Bullion trader and gold investors in China want the dragon country to take the plunge and buy the rest of the IMF gold, following India’s footsteps. India bought 200 tonnes of IMF gold for $1,045 an ounce. Soon after the India purchase, gold price zoomed to touch a high of $1,227 per ounce in November last year. Since then, the yellow metal price has come down. Gold is these days hovering around the $1,100-1,150 price range.
Last year, IMF approved the long-talked-about sale of 1/8th of its holdings, in "a volume strictly limited to 403.3 metric tons, with these sales to be conducted under modalities that safeguard against disruption of the gold market." The main IMF parameter to sell its gold reserve was that the sale has to be done at current market prices. So, now, the moot question is whether China will take the next step and buy 203 tonnes of gold from IMF at the current market price--$1,100-1,150 range?
Buying gold at the current market price would mean that China will be paying almost the same money per ounce of gold that India paid to IMF. Bullion experts recommend that China should go in for the IMF gold buy in this new year, as otherwise its ambitious task to mop up 10,000 tonnes of gold reserves in the next 10 years may be difficult to achieve.
The Chinese Central Bank—the People’s Bank of China—now holds record amounts of US dollars. But the gold holding of the Chinese central bank is at a paltry 1.8%. “China has set a big plan to mop up its gold reserves to beat the United States in the next 10 years. Currently, the gold reserves with the People’s Bank of China are the lowest for any central bank holdings, taking into account the booming Chinese economy,” says Jong-Yoon Chai, a bullion analyst based in Beijing.
According to him, even if China decides to buy 200 tonnes of gold from IMF, it will barely add up to 2% of the foreign exchange reserves of the Chinese central bank. “This is insignificant considering the big gold reserves target that China has set. So, it will be prudent if China buys IMF gold as early as possible before some other countries, may be India again, jumps into the fray to grab more gold from the IMF,” Jong-Yoon Chai told Commodity Online.
Jong-Yoon Chai says China is worried about the high price of gold when it comes to buying the IMF gold. “In fact, much before India decided to buy the IMF gold, the Chinese central bank had discussed and finalized plans to purchase the yellow metal from the global organization. One Chinese central bank official had even pronounced last year that China would buy IMF gold over a telephone call,” he says.
“But what prevented China from buying the IMF gold as per its wish was the zooming price of the precious metal last year. China thought gold prices would cool down to $800 per ounce and that would be the right opportunity. But gold at $800 per ounce was a price phenomenon of 2009 January. Now it will be impossible that gold price will dip to that level. So the best course of action for China now is to jump blindly at the IMF gold and grab it," Jong-Yoon Chai added.
Soon after India bought the IMF gold, Wei Benhua, former deputy head of the Chinese state administration of foreign exchange (SAFE), in an interview by the Chinese business magazine Caijing: “At present we should not buy. Instead we should wait for the IMF to sell gold next time, when the price of gold drops to a relatively low level, say, about $800 per ounce.”
Several central banks from China, Russia, Brazil, and even a small country like Sri Lanka are said to be in the fray to buy the rest of the IMF gold reserves. It cannot also be ruled that India will be buying out the complete stock of IMF gold reserves.
Dubai-based bullion analyst Mark Robison feels that China is waiting for gold price to dip further to buy the IMF gold. "My reading is that China is eager to buy gold for a price around $1,000 per ounce. The Chinese central bank is waiting for the right opportunity in bullion prices to jump into the IMF gold reserves," Robinson said.
China is the world’s biggest gold producer. In April, China increased reserves of gold by 76 percent to 1,054 tons since 2003. GFMS recently predicted that China will overtake India as the largest consumer of gold in the world.
China is willing to buy IMF gold, but not at the high price that India paid. Gold price may be zooming to records; but China wants to wait and watch so that price of the yellow metal crashes to realistic levels. Now, the question is will China be able to buy IMF gold at $1,000 per ounce in 2010.
David Lew is a precious metals commentator with Commodity Online. You can contact him at info@commodityonline.com
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