Competition for the IMF's Gold?

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On February
24, Reuters reported that the Reserve Bank of India was "set
to be a buyer" of the 191.3 tonnes (6.74 million ounces) of
gold the IMF is selling. Although the bank wouldn't comment directly
on the possibility, they did say, "We are closely looking at
the gold market… gold is a safe bet."

The article
then quoted an unidentified official from the China Gold Association
as saying, “It is not feasible for China to buy the IMF bullion,
as any purchase or even intent to do so would trigger market speculation
and volatility."

But the next
day, Finmarket news agency in Russia reported that China "confirmed
its intention" to buy the IMF gold. “Chinese officials have
confirmed previous announcements from IMF experts and said that
the purchasing of 191 tons of gold would not exert negative influence
on the world market."

While they've
been silent since, both India and China have publicly hinted they
want this latest batch of yellow bars from the IMF. There's no way
to know if a competitive bid would spring up between these two countries,
but…can you imagine the ramifications if one did?

When India
bought 200 tonnes of IMF gold last November 3, it set off a buying
spree that saw gold rise 14.2% in 4 weeks. What if this time around,
a couple central banks both want the gold for sale? What if China
says to India, "Not so fast, guys. We'd like to bid on that,
too…" and word of that clash leaked out?

Pure speculation,
of course, but competing for gold purchases isn't a far-fetched
idea. This sale is not pre-arranged; it's an open market sale. Also,
there's only so much to go around. These two countries have only
a tiny amount of their reserves in gold. Throw in the fact that
central banks worldwide are already net buyers.

A pretty delicious
thought, wouldn't you say?

The gold price
dropped a tad on the IMF announcement, but is up 1.1% since then.
It's pretty hard to make a case that IMF sales will hurt the gold
price. As I said a few weeks ago in my dirty
jokes
column, IMF sales tend to mark bottoms in the price and
not tops. The World Gold Council reported that floor traders now
consider $1,054 as a floor in the market. Why? That was the average
price India paid for the 200 tonnes they bought from the IMF last
fall.

Meanwhile,
what is our government doing?

You'll recall
that that big spike in the U.S. monetary base in late 2008 was never
before seen in history. The Federal Reserve basically doubled it
overnight. Our economist Terry Coxon described it as "beyond
unprecedented."

So, they stopped
that insane activity, right? Since December 2008, the monetary base
has swelled from 1.69 trillion to 2.18 trillion, a 29% increase
and another new record.

Printing paper
money vs. buying physical gold. I don't know about you, but I think
I'll follow China and India's lead here, even if I have to compete
for the price I pay for my gold.

March
13, 2010

Jeff
Clark is editor of Casey's
Gold & Resource Report
in Casey’s Daily Dispatch.

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