Bankers

"I have two great enemies, the Southern Army in front of me and the bankers in the rear. Of the two, the one at my rear is my greatest foe." - Abraham Lincoln



Thursday, February 18, 2010

IMF selling gold usually dampens demand, but this strategy may backfire bigtime.

Gold Key, weighing one kilogram is used to acc...Image via Wikipedia

The International Monetary Fund is again selling gold to bolster it's cash so as to be positioned to help (read bailout) more troubled economies, which seem to be propping up at present, all over Europe. When the IMF sells gold, it usually has a dampening affect on the price. Often, that is the real reason for selling in the first place. However, with China and India in the hunt for more gold reserves, the strategy is set to backfire.
Even though China has the 6th largest gold reserves in the world at this writing, it constitutes merely 1.5% of it's entire foreign reserves of over 2 $Trillion. Compare that to European countries like Germany who's gold reserves constitute over 60% of total foreign reserves. France= 61.5% etc etc.

China's gold reserves add up to a measly $29 per citizen, a paltry sum by the standards of developed countries. As China looks to diversify it's FR funds, gold will become a growing part of it's acquisitions. Even if China was to double it's gold reserves, that will only constitute 3% of total FR funds in it's huge and growing piggy bank.

This auction will be moved to the open market, however the IMF will honor bids from Central Banks and China will no doubt be a focal point. India may also look to bolster it's gold reserves, for the second time in 6 months, at this auction. They may even try to hide their intention using a surrogate possibly. Chinese investors will also play a role as their government is telling it's citizens to invest in the precious metal for their savings and as a hedge against inflation.

Gold as a hedge against inflation? Now there's a novel idea! However, there are smart people who believe that such sales are a drag on gold prices. They use history to bolster that argument.

“When the IMF sells, that’s bad news for gold,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. “Gold goes lower because there’s more supply.”

In the past this has certainly been the case, however, that past did not include the Peoples Republic of China as a buyer, nor the largest democracy on earth (India). It did not include their citizens, 2.5 Billion in total, as individual investors in gold either. As these two behemoths grow their middle class, and then tell those people to invest in gold, well that changes the dynamic, forever, especially when the known gold reserves currently above ground can fit into a space the size of two Olympic swimming pools.

In a gold rush, that supply can get eaten up in a heartbeat! As Government after government print more fiat currency and pump it into their systems, the argument for gold may turn into the biggest gold rush in history.

There is a trend here that investors should not ignore. It's no secret that countries like China, India and others, as well as their citizens, are wanting to diversify their FR funds away from the U.S. dollar, the Yen and the Euro and gold is in their cross hairs. If you don't hold gold or gold stocks in your portfolio in the current environment, then you are not paying attention.

For a more informed opinion on these matters you should read this interview with John Embry, Chief Asset manager for Sprott Asset Management.

Put some gold in your portfolio, now, before the rush!!

Article: If China buys IMF Gold

Soros and Hedge funds betting on gold


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