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China Buying IMF Gold?

Why isn't China Buying Gold from the International Monetary Fund...?

IN THE LAST FEW MONTHS, speculation in the gold market has been rife that China will be Buying Gold from the International Monetary Fund (IMF), writes Daniel Wilson in Beijing for Commodity Online.

But is China really buying IMF gold? Despite the hype about Chinese plans to amass gold reserves in place of the US Dollar, it seems the dragon country is not in the mood to Buy Gold from IMF.

This week, again, the IMF said that it sold 14.4 tonnes of gold in April, carrying out its program of planned bullion sales. The IMF has 403.3 tonnes of gold slated for sale as part of its bullion sales plan. Out of this, India – one of the largest gold consuming and importing nations in the world – bought 200 tonnes in November 2009. India's gold buying from IMF sent Gold Prices to the dizzying height of $1,227 per ounce in early December last year.

Sri Lanka and Mauritius bought small quantities of gold – 12 tonnes – from the IMF in between. Two months ago, the IMF announced that it would sell the remaining 191.3 tonnes of gold in the open market. So, as part of the open market sale, IMF sold 5.6 tonnes of gold in February, 18.5 tonnes in March and 14.4 tonnes in April. So far, IMF has sold 38.5 tonnes of gold in the open market.

The IMF has now 152.8 tonnes of gold up for sale. The moot question is whether China, that has been eagerly looking at Buying Gold and stepping up the yellow metal reserves, would buy the remaining IMF gold that is to be sold in the open market.

And the surprising question is why China is not buying IMF gold.

Even as central banks of several countries are Buying Gold from the international organization, might the rising price of gold be one reason forcing China to go slow on its own gold buying programme? Or is China, in fact, Buying Gold from the open market and then would come out with a surprising announcement next year that its gold reserves stand at 2000 tonnes? (Currently, the Chinese gold reserves held as foreign exchange reserve is around 1054 tonnes.)

David Lew, a keen gold market follower and bullion analyst, says there are several reasons why China is not Buying Gold from the IMF, though there have been rumors that the Chinese central bank was planning to buy the entire 191.3 tonnes of gold from the IMF once its Indian, Sri Lankan and Mauritian sales were complete.

First and foremost , however, is the fact that gold markets worldwide would turn into an immediate playground of speculation and excessive volatility if China said it was Buying Gold from IMF. "Even rumors that China was buying IMF gold two months back turned the bullion market highly volatile," points out Lew.

China has a relatively small position as far as gold reserves are concerned. The Chinese central bank – the People's Bank of China – holds only 1.2% of the country's foreign currency reserves in bullion. The largest chunk of China's reserves, around 70%, is held in US Dollars.

Secondly, Lew says the fact that China is not jumping into to buy IMF gold does not mean that the country is not interested in amassing gold reserves. "It looks China is Buying Gold these days from gold mines, rather than Gold Bullion. Clearly, China wants to balance its gold reserve position very carefully and meticulously," he pointed out.

Lew feels that another reason for China not buying the IMF gold is that in doing so, the Chinese currency Yuan would appreciate. "China does not want its currency to appreciate by Buying Gold from IMF," Lew added.

China has been nursing ambitions to step up its gold reserves in the last one year, driven by the declining value of US Dollar that the Chinese central bank holds as foreign exchange reserve. China also continues to aggressively promote gold investment. Jewellery shops continue to sprout across Chinese cities, towns and rural areas.

A recent report from the World Gold Council (WGC) said that private gold demand in India and China will continue to grow driven by jewellery demand, in spite of high local currency Gold Prices. In Q1 2010, India was the strongest performing market as total consumer demand surged 698% to touch 193.5 tonnes. In China, demand proved resilient; demand increased 11% in Q1 2010 to 105.2 tonnes.

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