Monday, September 28, 2009

HIDDEN REASONS FOR HIGHER GOLD PRICE


Gold prices in the past couple of weeks have soared to huge levels and touching new heights. In my last article I told that gold prices will go for correction and later on will again touch new highs. The time for correction have come or not is yet to be figure out but a small reason is be noticed that is the International Monetary Fund has approved a sale of 403 metric tonnes of gold reserves, in a move likely to raise $13bn (£8bn) of cash .These fund will be used to provide low-interest loans to poor countries and shore up its internal finances .
The IMF have decided to sell about one-eighth of its gold, the equivalent of nearly 13 million ounces, worth roughly $13 billion at current market prices.
Now please don’t think that the fund will be provided to BRIC nations. But the gold might come in the hands of Asian economies.

China, India and Russia, eager to reduce their position in dollar-denominated securities, have expressed interest in buying IMF gold. Attempting to sell the IMF gold is another short sighted illusory panacea which will create more problems for western financial institutions in the long term. As it may ultimately lead to a further increase in the wealth and power of Asian and other emerging economies and diminution in that of western economies and particularly the U.S.
The last time the IMF sold a significant quantity of gold was in 2000, when the 186-nation Washington-based institution was prompted to raised funds by economic crises in Brazil and Mexico. The sell will not be like the previous method of selling gold in TRANCHES. Since only 403metric tonne gold will be sold the quota of the Washington Agreement, is only limit of 500metric tonne. Hence it will be a faster process of selling the gold.
This sale will increase the supply of gold and will result to drop of demand as speculators will play the game. If India purchases gold then that will help to meet the demand that have arise and will continue due to festive season and marriage season. Moreover as the value of gold have gone up so much investors are bound to book some profit and await in the sidelines to take advantage of the downward price of gold. Similar to the outlook of IMF regarding selling gold at this high price.
Similarly when the IMF has sold gold previously, gold has fallen initially and then rallied in price in the medium and long term. In the past when their have been sales at different times, when major bull markets were either just beginning or, as in 1976-1980, at the start of the major parabolic move to then all time highs.
The IMF is expected to be running a deficit of $400 million in 2010.So its well clear that when prices will rise of gold due to inflation that will grow in all countries across the world economies, gold will be used as a hedging instrument. This will drive the price of gold to new high levels resulting IMF to sell more gold to reduce its deficit.
So as I wrote in my previous Article Gold prices to have short term correction but will make new highs in 2010
Those who are holding gold in their portfolio its better to encash and book profit and wait in the side lines to do investment.

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