Thursday, November 5, 2009

Did India Ignite A Global Central Bank Bidding War For Gold?

**All eyes are on China now (and to a lesser extent, Russia and the Arab Gulf States), to see how it will respond to the suprise news about India's large gold purchase, as it was largely expected that China would be the one to take on the IMF gold that is for sale**

William Pesek at Bloomberg News wrote an interesting commentary about the 200 ton IMF gold purchase by India.  It is interesting because one of the propositions asserted by long-time gold market analysts has been that eventually Central Banks globally would go from being net sellers of gold to being competitive net buyers as they seek refuge from the wealth destruction caused by fiat currency printing presses, specifically Bernanke's electronic printing press "that allows [the U.S.] to produce as many U.S. Dollars as it wishes at essentially no cost" (Banana Ben, 11/21/2002).

Pesek writes:  "A question no one can answer yet is whether India will touch off a bidding war among central banks...Traders are now betting on who will announce the next big purchase. Will it be China looking to employ its $2.3 trillion of reserves? What about Japan, which has the second-biggest pile of currency? Or Gulf states working to end dollar hegemony? And let’s not forget about Brazil and South Korea."  (here is the article link:  Pesek on India's Gold)

As discussed earlier this week, this purchase from India, combined with the renewed urgency exhibited by two of the world's largest gold mining companies to eliminate their gold hedges, points to a growing tightness in the global availability of gold bullion - exacerbated by the rapidly declining mining supply of gold.

An Indian official commented on India's gold acquisition:  “Gold as a proportion of our reserves is relatively small,” said R.H. Patil, chairman of National Securities Depository Ltd and Clearing Corp. of India Ltd. 'Gold is the ultimate currency. In fact, only gold came to our rescue during (the) 1991 crisis, so it makes sense that RBI should try to increase its gold holdings,' Patil said."

This same article noted that: "In the last one year, China has increased its gold holdings, by weight, by 75.69%, Russia by 18.78%, the Philippines by 18.50% and Mexico by 108.91%" (LINK)

So there you have it.  India's move earlier this week may well set off a global scramble, not only by large mining companies closing out their hedge book to avoid the financial devastation of being short gold via production hedges (Anglogold dropped $688 million on its hedge since July), but more significantly, we will see Central Banks, especially eastern hemisphere and Gulf State CB's, engage in a competitive scramble to accumulate large chunks of gold and unload U.S. dollar reserves.

I would suggest that the U.S. Government is quickly losing its ability to continue engaging in its scheme to keep a lid on the price of gold in order to support the vailidity of the dollar.  Furthermore, as you can see from the chart below, the price of gold has the potential to move significantly higher in price, with the technical and fundamental factors perfectly aligned to fuel a big rise:

In over 23 years of experience in all aspects of the financial industry, including 15 on Wall Street, I have never seen an investment opportunity with the low risk/high return characteristics of gold (and silver).


  1. Dave,
    I think Thailand said they had no plans to buy gold today, but I will have to check.

    Thnaks for the thoughts on silver, I think you are Spot on, pun intended.

    Off topic, can the Broncos beat the Steelers on MNF?

  2. gyc - I'm assuming your comment on Thailand was sarcastic. But now that you mention one-off countries, apparently Sri Lanka announced today that they have been and will be accumulating gold.

    Man, I dunno about the Broncos. I have to assume, since the Steeler's defense is similar to the Ravens, that McDaniels will make the necessary adjustments. Denver is only one of 4 teams that has not scored any points on their opening possession (4 or 5, I don't remember). They need to get that situation corrected.

    If I were going to bet the game, and I might, I would definitely take Denver and the 3 points. Other than that, I have no idea what to expect.

    You got any thoughts?

  3. Dave,
    no really I saw a headline in Thailand not buying gold, I will check. Almost done tonights post.

  4. dave,
    I am using Jesse's bubble graphic tonight, if he has an issue with this I will take it down immediately but I think it is fair use and I attributed the work. Hope it is OK.

  5. SriLanka has been buying also.

  6. Dave can you do an article on some of the gold junior miners that you follow? I know you like, are there any others you like? Thanks!