Will China Buy the IMF Gold?
by Michael Rozeff I assign a low probability to China buying gold from the IMF near or even 10-15 percent belowcurrent prices. All opinions in this article are based solely on published news reports and nothingelse. A number of reasons for my opinion are presented below.(1) To begin with, China hasn’t bought the IMF gold up to now, and it has had plenty of time todo so. Action, in this case inaction, speaks louder than words. China also has had the opportunityto buy gold in the non-China open market for years, that is, to buy gold from sources other than production within China. It hasn’t done so.(2) Chinese officials are constantly being told by Chinese commentators, economists, professors,and those with an interest in gold that it should buy more gold. The amounts they suggest are far in excess of China’s local production, so that these advisors are really telling the Chinesegovernment to go into the external market or buy from the IMF. So far, the government hasignored this advice, unless they are acting secretly. Instead, they are augmenting their gold stock in their own way by buying up local production, and at their own pace, which is gradually.Gradualness is in accord with the gradualness observed in allowing appreciation in the yuan andin opening China to capital flows.(3) When asked about their gold intentions, Chinese officials recite a litany of reasons for notgoing into the market. For one thing, they say that the price is too high. They’ve been saying thisfor the last $500 of price rise. For example, here is what one news article dated May 11, 2006wrote:“The mainland government is being urged by local economists to boost its gold reserves.But the country may find bullion too expensive to buy at current 25-year highs aboveUS$700 (HK$5,460) an ounce, traders said.“‘They won't buy at this level, it's too high,’ said Ellison Chu of Standard Bank Asia inHong Kong. ‘They might be there buying if the price were US$400 or US$500.’”Mr. Chu was listening to what the officials said, and if we search enough we can find their directstatements that prices are too high. Whether or not this reason makes any sense as a policy todirect gold investment, this is what they say. If they didn’t buy in bulk years ago at $700, they’renot going to buy in bulk now at $1,100.(4) Another reason they give is that they don’t want to drive up the price by their own buying.Then they say that no matter how much they can reasonably buy, it’s not that much compared totheir mountain of reserves. They sometimes suggest that gold is a risky investment. And they topit off by saying that gold isn’t that hot an investment over a 30-year period. Whatever the validityof these arguments is or isn’t, they trot them out all the time. Some of these arguments areexamined below.(5) When China recently announced that its gold reserves had risen, one press report told us: