The Yajnik Letter

Reuters reported on Feb 24 that the Reserve Bank of India was poised to be a buyer of the 191.3 tonnes (6.74 million ounces) of gold that the IMF is looking to sell. Obviously, no confirmation either way was made by the bank. Nonetheless, the bank did say that gold would be a safe bet and that they are focused on this sector.

The article then quoted an unidentified official from the China Gold Association as saying, “It is not feasible for China to buy the IMF bullion, as any purchase or even intent to do so would trigger market speculation and volatility.” However, the next day, Finmarket news agency in Russia said that China “confirmed its intention” to buy this gold. “Chinese officials have confirmed previous announcements from IMF experts and said that the purchasing of 191 tons of gold would not exert negative influence on the world market.”

So, which is it? India is interested. Is China interested? If so, could there be competition for the IMF gold? If India makes an offer, I could see China tapping India on her shoulder and say, “Hold up a minute. We are also interested.” If that happens, it would send fireworks in the gold market similar to what happened when India bought 200 tonnes of IMF gold last Nov 3. When that happened, gold surged 14% in 4 weeks. Now, if both banks get into a bidding war, I am sure the surge would be much higher.

Now, the scenario I have laid out is speculative but very possible. India and US have good and improving relations. US and China’s relations are that of need, not desire. China needs US to continue buying Chinese goods and the US needs China has China is a major buyer of US treasuries. India and China’s relations aren’t exactly that of best buddies. So, if India makes a bid, I wouldn’t be surprised to see China counter. Keep in mind China has been on a buying spree for mining companies and anything that has real value and is comprised of real assets. Also, buying gold would be a good way to lessen their exposure to US currency.

The World Gold Council reported that floor traders now consider $1,054 as a floor in the market. Why that number? Surprise, surprise! That was the average price that India paid when they bought 200 tonnes of gold from the IMF last fall.

So, what has our government been up to? Check out the chart above (click on it to make it bigger). What’s the fancy word Washington DC and other central governments around the world has been using? Ahhh yeah! Quantitative easing! Why not just say what it really is? Governments trying to bail themselves out by recklessly printing currency at will. Since Dec 2008, the monetary base here in the US has grown from 1.69 trillion to 2.18 trillion, a 29% increase and let’s get the drum roll going….ANOTHER NEW RECORD!

With all of this activity going on globally, it doesn’t surprise me that many central banks have become net buyers of gold. All of this printing will eventually lead to crazy inflation. When? I am not smart enough to know. But, I am slowly preparing myself for when it does become a mainstream reality.

-Samir