When the International Monetary Fund said several months ago that it would auction off 403.3 tonnes of gold, the presumed buyer in most people's minds was China, which is desperate to diversify its reserves away from U.S. dollars. Instead, it was India that snapped up 200 tonnes from the IMF. So who will buy the rest of the IMF gold? According to Morgan Stanley analysts Peter Richardson, Jeremy Friesen and Hussein Allidina, China is still the most obvious buyer. In a note to clients, they pointed out that buying the remaining IMF gold would raise Chinese holdings by as much as 19%, based on the 1,054 tonnes of Chinese reserves reported in April. However, they are not convinced that China will buy the gold. They pointed out that China is now the world's largest producer of gold, and could buy its own output. That would reduce its risk of exposure to the "market prices" that India had to pay. "As such, the higher gold prices rise, the less likely China will be interested in IMF gold, in our view, and the less likely the remainder of the sales will be completed 'off-market' in 2009-10," they wrote. "Nevertheless, given the reduced IMF overhang and continuing fiscal and monetary stimulus policies, the [gold] market may rise even without Chinese buying." The analysts also wrote that the India sale is a sign that gold's near-term direction seems to be "squarely in the hands of the central banks." The view that central banks will be net buyers of gold is bolstered by dovish policy from the U.S. Federal Reserve, a rise in U.S. unemployment, and the continuing commitment to economic stimulus by G20 finance ministers. All of those factors suggest more U.S. dollar weakness and inflation risk in the longer-term, the analysts wrote. Their base-case forecast for gold in 2010 is US$1,000 an ounce. http://network.nationalpost.com/np/...ve/2009/11/09/china-may-pass-on-imf-gold.aspx
I think there is a good chance that India will end up being the proverbial sucker just as the sovereign funds were in 07. Gold is likely to go higher in the short run, but you can be sure that the higher it rises the harder it will fall.