Many of you may have heard about the ancient Chinese curse ‘May you life in interesting times‘. Well - it looks increasingly likely that that is exactly what the month of December has in stock for gold bugs, central bankers and last but certainly not least the Chinese alike.

Fresh on the heels of my recent commentary on the backwardation of gold in early December, rumors are spreading, that the International Monetary Fund will start to dump gold 1′000 tons at a time as early as Dec 10th in order to punish gold investors while propping up fiat currencies, potentially sending the price of gold to the mid US$400 range in a matter of weeks. Now that would hurt pretty bad now - or would it?

Probably not actually, because this would be the move China might have been waiting for to jump in and diversify out of their US$1.9 Trillion to increase its gold reserves. Doing so they would merely follow through on intentions predicted earlier when sources were quoted asserting that China wants to do this exact thing and in fact do so to the tune of 4′000 (!) tons. As huge as these moves appear at first glance, anyone can easily calculate that at current rates 4′000 tons of gold would represent a merer 5% of China’s vast reserves. So why would China not jump on this opportunity? Robert Mundell of ‘father of the Euro’ fame and winner of the Nobel price for Economics in 1999 certainly thinks it is a good idea and considering that he is an advisor to the Chinese government I would be surprised if he would not have made his feelings known to them at an opportune juncture.

Now throw in the fact that not only does one of the top managers of China Investment Corp, the country’s US$200 Billion sovereign wealth fund, reckons current dollar strength is temporary but that China is also not squeamish when it comes to deploying beggar thy neighbor policies as demonstrated in their reported intention to severely devalue the RMB in the short term to boost exports and the pieces should be starting to fall together. By the time the devaluation idea was applauded in China’s official foreign language news outlet, the deal seems unlikely to be all but done and sealed actually. Add to that China’s stated unwillingness to bail out western firms and the question arises what can China do with its wealth beside investing US$586 Billion very wisely over the next two years into domestist infrastructure projects? A moved mirrored by president elect Obama by the way.

In the face of these numbers, why would the Chinese not spend US$25 Billion for every 1′000 tons of gold the IMF is willing to part with? Beats me.

This entry was posted on Tuesday, December 9th, 2008 at 2:21 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.