Why did emerging Asian central banks Buy Gold from the IMF...?
The INTERNATIONAL MONETARY FUND just announced that it sold 32 tonnes of Gold Bullion in September, writes Julian Phillips of GoldForecaster.
This included the 10 tonnes of Gold Bullion sold to Bangladesh, leaving around 71 tonnes left to go from the IMF's total 403 tonnes first slated for sale in early 2009.
We have passed October now, so if the IMF sold a similar amount of gold last month, then we are down to just below 40 tonnes remaining. If they continue this pace of selling in November, the IMF will only be left with less than 10 tonnes to sell in December and will complete their sales before the end of this year.
We have no reason to believe that central banks in the emerging world will then cease buying, so where will they get future stock from? These buyers are not price sensitive, so will have to attempt to Buy Gold in the open market, where they cannot buy their own local production. If more central banks than are present now in the open market arrive, they will not be able to use the 'limit' order system to Buy Gold only when offered. The bullion banks will be able to ask for better offers simply by placing it in the gold Fixing and waiting for the best offer to arrive. This will turn central bank buyers from 'passive' buyers into 'active' ones.
It would be easy to assume that East Asian central banks will not buy more gold once the IMF completes its sales. Central banks have been the main buyers of this gold, with three central banks taking 222 tonnes between them and unknown buyers taking the balance in unannounced deals. We have to ask, did the central banks take this gold because it was just there, presented in a way that they could acquire it without disturbing the Gold Price? Or did their belief in a future time when gold would help them in dark days influence their decision?
Alternatively, these central banks bought the IMF's gold because it is a good investment and counters the decline in currency values they fear might happen. All these motives are good ones, and together they justify conservative central banks Buying Gold again in 2011 and beyond.
However, there is one aspect that has not really been considered. You will note that the central banks that bought this gold were from the Asian emerging nations. Primarily they were nations stemming from or part of the Indian sub-continent. These nations have always respected gold and considered it money without wavering over the centuries. They have never been totally convinced that paper money is 'as good as gold', as the West has.
These rising Asian powers are all part of the emerging east and are fully aware that wealth and power is moving eastward. It is a completely logical step to believe that the power that the US Dollar now holds will move eastwards to some extent. With the stresses and strains this process will entail, it is likely that eastern currencies, to some extent will rise in importance, as the Dollar declines. It makes sound investment sense now to lower their dependence on the US Dollar and diversify into other currencies. But which ones? The future is so uncertain one cannot be sure of the value of any other currencies. It makes good sense to turn to gold, which history has shown rises in value and usefulness in such days.
Will central banks cease Buying Gold after the IMF sales are complete? Even now that they have these amounts in their reserves, we think not, but any desire to buy more will have to be tempered by the effect their buying in the open market will have on prices. As we discussed above, the concept of 'limit' buying will have to give way to a more direct and active approach if gold is to be bought successfully. If there are several central banks present in the market at the same time (we hear that Bangladesh is in the open market still)] they will never chase Gold Prices, but will lift the limits on their buying so as to cause a slightly faster rise. This will allow other investors to come into the market but they will have to chase what remaining stock there is with higher prices.
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