Friday, April 3, 2009

IMF Plans To Sell Off Gold

This week gold prices have been dropping, hitting a low of $893.24 per ounce on Thursday, April 3rd. This is partly due to the rally in equities, with the Dow rising back up above 8000 points, with investors hopeful that the G20 meeting will help implement solutions to the global economic recession. The second reason is that on Thursday the G20 summit participant countries endorsed a plan by the international Monetary Fund to sell over 400 tons of gold. With this gold being seen as additional supply entering the market place, demand naturally dropped. The IMF's selling of gold, however, has been planned for some time now and Thursday's affirmation by the G20 didn't indicate any new plans to sell off gold.

G20 supports IMF plan to sell gold

What does this mean for gold prices? Well, the price of gold will likely remain down in the short term, as stocks rally. Also, I imagine the prices will fall somewhat when the IMF sells off 400 tons of its reserves, simply because the selloff conjures up images of excess supply flooding the market and will scare some investors into selling. However, the gold market will most likely bounce bank when it becomes clear that the buyers are mostly the central banks of countries who want to increase their own gold reserves. Particularly in emerging economies like China, Russia, and India, there is a desire to acquire more gold for their reserves and reduce US dollar reserves. So even though this selloff may cause a shockwave, I think it will actually improve the fundamentals of gold, because the dollar's value will fall as it is sold off by these countries' central banks. There won't be an immediate rush out of the dollar, but they will gradually reduce the amount they hold.

As for the equities rally, I think this is another short term rally, and I don't think we've seen the market's bottom yet. This recession (I'm being nice and avoiding the "D" word, even I think that's what we're entering) is far from over. And even when the stimulus finally kicks in, we may see stocks rally again, but with inflated currency - making it an artifical rally, essentially. I have little doubt that gold will outperform stocks over the next couple of years. We are, after all, in the middle of a precious metals bull market that is far from over. Equities are in a bear market. I wonder if people have forgotten that markets are cyclical. They seem to think that equities can be in a bull market forever with only minor short term interruptions. These people are still in denial of what is really happening.

I'm still holding onto all my gold. In fact, when the IMF sells off gold, if the price drops I will be buying more.


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