12:33 November 05, 2009
I’m happy to duly oblige with the following contribution to the rumour mill:
Imagine that you knew before hand that Warren Buffett was about to buy stocks in Burlington North Santa Fe, what would you do? Undoubtedly you would have rushed to buy BNSF before the old man did, knowing that his move would certainly prop up the stock price.
That’s the same spirit in RBI’s buying gold from IMF: it knows (or suspects) that the Chinese are interested in the IMF gold or even already are in negotiation with IMF about a possible purchase. If the Chinese pull this off, gold price would certainly shoot up (I’ll save the usual, lengthy ranting about Chinese confidence in the US dollar for another day). Hence, RBI did the logical thing – jumping into the trade first, before the Chinese did.
Only that India is not your normal retail investor. China might be the Warren Buffett in this case, but India is equivalent to George Soros. Gold price shot up on the news of the RBI purchase. Now the PBOC is left with an elevated gold price and a choice to make: should it follow suit or stay put? The risk is that, if PBOC wavers, some others (most likely some Gulf states) may see opportunity and steal the show, leaving the Chinese at the end of the price queue.
Clearly RBI had outmanoeuvred PBOC this time around. With hinder sight, the first mover advantage was on the table for both to grasp – the profit could have been PBOC’s, had it not attempted to negotiate a discount with IMF (that’s pure speculation on my part, but I do know the Chinese habit of bargaining over anything and everything). My take is that PBOC will soon announce its purchase of the remaining 203 tonnes from IMF. The move will push gold price to US$1,200/oz.
Hopefully this won’t trigger a bidding war on the open market.