India buys 200 tons of IMF gold.

After India, China may buy IMF gold

The news today that India is going to buy 200 tons of IMF gold lit a fire under the gold market. I will say that this pretty much seals the debate on whether or not we will see a breakdown in the gold price.  We will not.  It is becoming more likely that $1,000 is in the rear view mirror for our life times.  If course some major stock market crash could change that, however even then I think you’ll see $1000 become the floor and looked at as a buying opportunity.

The news is so bullish because it take 200 tons of supposed supply overhang off of the market.  It also signals that central banks are moving back into the gold buying business instead of being in the gold selling business like they have for the last decade.  That is a HUGE change in the supply/demand picture.  Furthermore, it solidifies that a change in psychology toward gold is at hand.  India is not a minor player in gold.  In fact their retail market is a huge driver of physical gold buying.  If their central bank is buying gold at $1,000, what does that say to their citizens about what their government thinks of gold at this price?  Yes – it is still inexpensive. I look for Indian demand to surge over the coming months.

After all, do the math.  In a world where we no longer talk about “billions” or even “tens of billions of dollars” and instead talk about trillion dollar deficits and hundreds of trillions in derivatives, India just got 200 tons of gold, 6.4 million ounces (if my math is correct) of honest money for $6.7 billion dollars.  What an incredible bargain.

Lastly, it will have many other central banks (especially China) eying the remaining 200 tons of IMF gold and getting in line to scoop it up.  Wait until that announcement comes out.  If central bank psychology is changing, and 400 tons of supply are gone in a heartbeat, where will the gold be found to satisfy other central bank demand?

So here we are in a major week after which the dollar should come under pressure, yet gold is up over $20 to a new all time high on the India news even though the dollar is rising and the stock market is down.  This is the decoupling that many have looked for.  To be sure, one days’ trading does not a trend make.  But it has to start somewhere.

Category: Economics, Global Economics, Markets, Precious Metals, US Dollar