Why China is not buying IMF gold

BEIJING: In the last few months, speculation has been rife in bullion markets around the world that China will be buying the gold that the International Monetary Fund (IMF) is disposing of these days. But is China buying the IMF gold? It looks, despite the hype about Chinese plans to amass gold reserves in place of the US dollar, the dragon country is not in a mood to buy gold from IMF.

This week, again IMF said that it has sold 14.4 tonnes of gold in April, carrying out with its programme of planned bullion sales. IMF had 403.3 tonnes of gold to be sold as part of its bullion sales plan. Out of this, India--one of the largest gold consuming and importing nations in the world--bought 200 tonnes in November 2009. India's gold buying from IMF sent gold prices to the dizzying height of $1,227 per ounce in early December last year.

Sri Lanka and Mauritius bought small quantities of gold--12 tonnes--from IMF in between. Thus, IMF had 191.3 tonnes of remaining gold for sale.

Two months ago, IMF announced that it would sell the remaining 191.3 tonnes of gold in the open market. So, as part of the open market sale, IMF sold 5.6 tonnes of gold in February, 18.5 tonnes in March and 14.4 tonnes in April. So far, IMF has sold 38.5 tonnes of gold in the open market.

IMF has now 152.8 tonnes of gold up for sale. The moot question is whether China, that has been eagerly looking at buying gold and stepping up the yellow metal reserves, would buy the remaining IMF gold that is to be sold in the open market.

And the surprising question is why China is not buying IMF gold, even as central banks of several countries are buying gold from the international organization. Is the rising price of gold one reason that is forcing China to go slow on its gold buying programme? Or is China, in fact, buying gold from open market and then would come out with a surprising announcement next year that its gold reserves stand at 2000 tonnes? (Currently, the Chinese gold reserves held as foreign exchange reserve is around 1054 tonnes)

David Lew, a keen gold market follower and bullion analyst, says there are several reasons why China is not buying gold from IMF, though there have been rumors that the Chinese central bank was planning to buy the entire 191.3 tonnes of gold from IMF.

First and foremost is the fact that gold market in the world will turn into an immediate playground of speculation and excessive volatility if China is to buy gold from IMF. Even rumors that China was buying IMF gold two months back turned the bullion market highly volatile, points out Lew.

China has a relatively small position as far as gold reserves are concerned. The Chinese central bank--the People's Bank of China--holds only 1,054 tons of gold, amounting to just 1.2% of the country's gross domestic product. The large chunk of China's reserves--around 70%--are held in US dollars.

Secondly, Lew says the fact that China is not jumping into to buy IMF gold does not mean that the country is not interested in amassing gold reserves. It looks China is buying gold these days from gold mines, rather than gold bullion. Clearly, China wants to balance its gold reserve position very carefully and meticulously, he pointed out.

Lew feels that another reason for China not buying the IMF gold is that in doing so, the Chinese currency Yuan would appreciate. China does not want its currency to appreciate by buying gold from IMF, Lew added.

China has been nursing ambitions to step up its gold reserves in the last one year, driven by the declining value of US dollar that the Chinese central bank holds as foreign exchange reserve. China also continues to aggressively promote gold investment. Jewellery shops continue to sprout across Chinese cities, towns and rural areas.

A recent report from the World Gold Council (WGC) said that gold demand in India and China will continue to grow driven by jewellery demand, in spite of high local currency gold prices. In Q1 2010, India was the strongest performing market as total consumer demand surged 698% to touch 193.5 tonnes. In China, demand proved resilient; demand increased 11% in Q1 2010 to 105.2 tonnes.