Commodities | Feb 22 2010
By Rudi Filapek-Vandyck
Part of the gold investment community, otherwise known as the gold bugs, is getting excited about the pending sale of some 191 tonnes from the IMF gold reserves. Last time, the news that the central bank of India turned out the buyer of 200 tonnes of IMF gold triggered an overall buying frenzy, pushing gold swiftly past US$1200/oz for the first time in history.
What'll happen this time?
Citi's widely respected commodity analyst Alan Heap might be partially responsible for the renewed market excitement. In a report published over the weekend Heap suggests that since China has been selling some US46bn in US Treasuries of late, it must follow that China will be knocking on the IMF's door to get some gold. Interestingly, China has been increasing its gold reserve over the past years, but it has done so through purchases directly from local gold producers, as did the Russians.
So is China knocking on the IMF's door?
It has to be noted that in November last year, when the Indians ended up buying 200 tonnes from the IMF, with smaller sales to central banks of Sri Lanka and Mauritius, the Chinese never expressed any interest and -to the contrary- subsequently went on record to suggest gold was in a speculative bubble, just like hedge fund icon George Soros suggested earlier this month.
But the gold bugs community traditionally has no space for such considerations and already the speculation by Alan Heap has found its way to blogs and other websites. Said Heap: "The PBC [People's Bank of China] is the most likely central bank buyer. The bank is deeply dissatisfied with the performance of its US treasury holdings and has made clear its intention to diversify including into gold. In November and December the PBC sold USD46bn of treasures; they must be buying something."
While Heap might be directly responsible for injecting the latest dose of enthusiasm into the gold market, he has used the opportunity to highlight that when it comes to sustainable gold price gains, Citi is not on the side of market bulls who are predicting gold prices north of US$1500/oz and higher later this year.
Citi's present price forecast for the second half of 2010 stands at USD1162/oz. This is admittedly higher then the current price, but far from figures mentioned elsewhere (US$1500 is rather low if we take into account the US$2000-3000 and higher numbers bandied around in more bullish circles).
But Heap concedes one thing: there are two potential catalysts hanging over the gold price that could potentially trigger a big surge: fiscal deficit concerns could escalate and inflation is possible (even though, let's face it, the underlying threat in the US still seems to favour deflation at the moment).