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Did China seal IMF gold deal? Prices may go up

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1 Did China seal IMF gold deal? Prices may go up on Sun Mar 07, 2010 11:35 am


Did China seal IMF gold deal? Prices may go up
Published on: March 01, 2010 at 14:30

NEW DELHI (Commodity Online): Will they, won’t they? That is the billion dollar question looming large over the global bullion market now with China rumoured to have sealed a deal to buy the International Monetary Fund (IMF) gold.

This move from Beijing comes after India bought 200 tonnes of IMF gold in early November 2009, which triggered a gold rally in the following months in global markets.

ALSO READ: Dump paper currencies, buy gold: Marc Faber

So, now is it China’s turn to play the bull in bullion market? It seems so. If media reports are to be believed, China has already sealed a deal with IMF to buy 191.3 tonnes of gold, which the monetary fund currently has for sale from the 403.3 tonnes put up for sale since January 2007.

Whether or not the transaction goes through, the bullion market is going to witness huge volatility. If the Chinese bullion deal goes through as anticipated, it would provide tremendous boost to the sentiment towards gold.

Investor interest in gold is sure to rise, unleashing a speculative frenzy in the bullion market. Gold prices have the potential to spurt by anything between $50 and $100 an ounce, bullion dealers say. Currently the metal is facing resistance at higher levels and is struggling to decisively break the $1,100/oz barrier. The firm dollar is far from supportive.

In anticipation, gold prices increased by 1.3 per cent on Friday. The London PM Fix was at $1,108.25/oz.

China has approximately $2,400 billion as foreign exchange reserves and has been building stocks of gold through domestic purchases as part of asset diversification. IMF deal would add to its already solid gold reserve.

On the other hand, if the China deal does not go through and IMF does not quickly find a buyer, the metal may come to the open market for sale. It will not only augment supplies, but also send out negative signals and dampen sentiment in the gold market. Gold prices can decline sharply.

While IMF gold sale to China would boost prices, sale in the open market may adversely affect the sentiment. Either way, huge volatility in gold prices would ensue.

In early November 2009, the Reserve Bank of India purchased 200 tonnes from IMF in a surprise off-market transaction that bolstered positive sentiment towards the yellow metal.

A couple of small Asian countries too bought modest quantities. Subsequently, by early December, the yellow metal hit a record $1,226/oz, after which there has been a correction.

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