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XMFSinchiruna (26.50)

China to Purchase IMF Gold!?!



February 25, 2010 – Comments (12)

We definitely need some additional confirmation of this story before feeling confident of its veracity, but Russia's PRAVDA is reporting (second-hand from a "Finmarket News Agency") that China's central bank intends to purchase the remining 191.3 tons of IMF gold.

One could only really call this a rumor at this stage until we get confirmation from another source, but it may well have been a catalyst behind today's strong intraday surge in gold above the $1,100 mark.

I'm not reporting this as a news story, but rather suggesting that it's something to keep an eye on. If a central bank buyer for the IMF gold is announced, I believe that will mark the beginning of the end of this minor correction after the run to $1,220.

12 Comments – Post Your Own

#1) On February 25, 2010 at 4:41 PM, binve (< 20) wrote:

Hey Sinch, I saw that this morning too. **very** interesting! Thanks man!

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#2) On February 25, 2010 at 5:02 PM, XMFSinchiruna (26.50) wrote:

And relating loosely through the China connection, try this one on for size:

If you have or desire exposure to the dry bulk sector, you're going to want to review this analysis.

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#3) On February 25, 2010 at 6:52 PM, XMFSinchiruna (26.50) wrote:

Hey Fools: that featured article by Morgan Housel is well worthy of a look!

Please find my comments below it (comment #3).

What do you think?

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#4) On February 25, 2010 at 6:54 PM, XMFSinchiruna (26.50) wrote:

Warren Buffett's Bid to Save the Economy

... And How it Failed.


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#5) On February 25, 2010 at 7:22 PM, XMFSinchiruna (26.50) wrote:

Good Mineweb article on the Pravda story:

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#6) On February 25, 2010 at 7:42 PM, XMFSinchiruna (26.50) wrote:

Update from Kitco:

The International Monetary Fund (IMF) said it had no comment on a rumor that China is the buyer of the remaining 191.3 tons of gold the IMF is selling.

Alistair Thomson of the IMF's Press Office told that the agency does not comment on speculative stories, calling this a "sensitive area" of discussion.


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#7) On February 25, 2010 at 7:48 PM, XMFSinchiruna (26.50) wrote:

From JSMineset's Trader Dan Norcini:

I have no way of confirming the accuracy of the report but perhaps this is what put such a fire under the gold market today. It does seem strange to me to read of China announcing their intentions before hand in such an obvious fashion however as they are generally quite secretive about their buying or selling until after the fact. Besides, if news like this was confirmed, it is not hard to understand how that would just about guarantee them a much higher purchase price unless of course the IMF had already agreed to sell them the gold at a predetermined level.

Either way it serves to underscore the fact that the Asian Central Banks are still wanting to buy gold, assertions by the plethora  of gold market analysts here in the West who erroneously interpreted the original news about the IMF sale as a sign that demand from these official sources was waning. As I said then and will say now again, Asian Central Banks have already made quite clear their interest in acquiring gold to diversify their reserves. They are not going to stop doing so because a Prechterite shows them an Elliot Wave chart that looks like a mountain range somewhere in Tibet.

The East has a history of respect for the yellow metal unlike the West which in enthralled with paper slips printed with ink which they seemingly increase with reckless delight.

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#8) On February 26, 2010 at 7:07 AM, XMFSinchiruna (26.50) wrote:

All to close with a haliraious ending:

Contacted by Reuters, the author of the Rough and Polished story, Nadezhda Shagrova, who works as a tour guide and journalist in Shanghai, said she did not have any official information to back up her story.

"The source for the story? Well, that's been written about in lots of places. I mean, Xinhua news agency wrote about that and other official Chinese sources, lots of them. Why are you asking?"

Told that gold prices were moving on her story, she said:

"No, no, there's just no way that could be because of my article."

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#9) On February 26, 2010 at 7:09 AM, XMFSinchiruna (26.50) wrote:

Monetary Fund to avoid sparking market volatility, BusinessWeek reported, citing state media. The official's statement follows speculation that China would purchase gold from the IMF, which helped to push up gold prices US$10 to US$1,106 per ounce. The World Gold Council said earlier this week that China was not a "realistic candidate" for a purchase of bullion; the China Gold Association official said China would boost its reserves through investments in overseas mines. Some analysts have suggested that the People's Bank of China would buy gold bullion from the IMF to diversify its assets.

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#10) On February 26, 2010 at 10:53 PM, LiveOakGrey (< 20) wrote:

Hi Sinch,

If this woman's unsubstantiated story can push up the gold price by $10 an ounce, it's a perfect example of the non-rationality of the market and another smallish nail in the coffin of the efficient market theory.

Another idea for why China would announce plans to buy gold before they actually buy it (assuming it's even true) would be the reverse of when England announced they were going to sell off substantial gold reserves, recently. Using reverse psychology to create a market swell in one direction, that China might buy gold more cheaply from when their non-IMF buying-event slapped the price back down?  China may have all kinds of temporary cash gains from speculating in derivatives, too. 

Large scale gold shorting by bullion banks, sovereign governments, and central banks already gets into all kinds of conspiracy theories, except you substitute the usual suspects with PRC and Guomintang, instead of Men in Black and L.G.M.s .  As Dr. Pangloss said, "we should all wear our tin-foil hats."

1)  Distantly related to China affecting the markets, I'm wondering since there are markets open at different hours around the globe, are there markets for buying/selling stocks/options on week ends?  It seems like there should be such a huge market for online traders and LTBH purchasers that a weekend is such a wasted opportunity.  Do you know of any 'afterhours' markets that a non-politically connected person can access?  

I'm not looking for illegal bucket shops, but wondering if there's anything out there that fits the bill.  I'm finding that being on the west coast, requires you to get up at 5 a.m. to be prepared to bargain hunt, when the markets open at 6:30, our time.  There should be more out there that doesn't open and close so early.  We may be the most bankrupt state, in California, but, we're also the most populous, and again it seems inefficient to lose all that willing capital by reducing the numbers of hours most non-professional traders can access the markets.

2)  Another question, is there a rule of thumb or site that explains what the price volatility is for the underlying prices of gold and silver vs. the percent changes in Large cap miner stocks, Intermediate stocks, and Small caps that produce (or prospect for) the metals in question? 

You've mentioned David Butler as being 'dialed in to the markets,' and Jim Sinclair as being all-around deeply knowledgeable.  Sinclair seems to be a bit of a conspiracy nut, but much of it is probably correct.  I recall Sinclair kept predicting some event with China giving us ultimatums that was going to pass in mid- November (or somewhere) and nothing seems to have happened, and he's quietly stopped talking about it.  I guess it could be worse, Sinclair could start blogging on the Fool like one of our 'attorney' members, with articles titled " 'You Will Know The Coming of the Apocalypse of Financial Doom on 6/6/10 (at 6 PM, Eastern Standard Time)' - Paltrynomics."

3)  Along wit David Butler, Jim Sinclair, what do you think of David Tice?  Any other commentators you think have good credentials, and in any particular areas of focus?

I looked into contributing more information for the community in Australian small cap producers, but found the information to be unreliable and scarce. Most of the stuff out there seems to be just marketing inspired hype, with little trustworthy detailed backing on claims.  A small thing to still be proud about the American (and Canadian) markets is the government insistence on relative opacity of the financials behind the companies in question.  

It's a shame that government, big business, big union collusion, combined with the millions of 'common folks on main street' who were all to happy to run up credit card debts while everyone else said the chickens would never come home to roos for all these years - has ruined the economic system.  It will be many more years till it recovers from the toxic fall-out that is happening around us.  

Paraphrasing Ben Franklin, "You'll have a republic if you can keep it, but none has lasted long, due to the corruption of the people."

Thanks for all the good work you do.  You mentioned you were ruining your vision on our behalf, so we'll all chip in and buy you a nice set of black nerd-coke-bottle glasses in the best early 1960's engineer type frames, and a better 1940s gooseneck nerdish table lamp to study by.  Don't bother thanking us, you deserve nothing but the best from your admiring minions. ;)






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#11) On February 27, 2010 at 9:27 PM, LiveOakGrey (< 20) wrote:


On another unrelated note, I've been meaning to ask you if you can recommend any books/articles/sites on evaluating miner stocks, and if you know anything else about good books on options. 

I recall you mentioned something before about paring down your positions in some stocks to manage your allocation.  Are you actually trading off some of your current stocks to do this and paying taxes for cap gains on them?  What about just adding to your other positions until your allocation percentages are approximately right?  

Maybe you have 4 intermediate positions and 700 small caps, and the small caps only produce zinc and chewing gum, and you can't add to all 700 of them each and every time you want to balance your portfolio?  So probably something hair-brained like I'm suggesting wouldn't actually work, would it?  Chewing gum is something you wouldn't want to trade out of, anyways, better keep all you've got. 

I like the idea of LTBH for precious metal stocks for the next few years.  My portfolio is brand new as of this month (finally got some capital freed up to invest in stocks!) so my core allocations aren't 'balanced,' yet.  Right now, my favorite picks are highly skewed, and I'll need to buy some other positions in a few other companies to give it more balance. 

Another issue I'm wondering about, is how much concentration to give to my core holdings.  You seem to have the 'scattershot' approach, where you have lots of small cap holdings.  Sounds fun, and I can see you always have a bargain to snap up, but does it increase the number of transaction costs you have to bear?  i.e. 10 trades into small cap positions for every 1,000 dollars, instead of one trade into a single position for the same money?

Do you have any kind of allocation percentage you lay out for large caps, intermediates, and small caps?  So far, I seem to be heavily weighted to intermediates, with a moderate amount of exposure to some small caps. No large caps, as of yet.  What's your thinking on this issue?

There are the gold/silver ETFs and I think you've mentioned having positions in them before.  What recommends this, besides just being more diversification?  What percentage allocation of a portfolio is good to have in physical ownership?  Aren't the capital gains on physical ownership about 28%?  That's a law we need to actively correct.  

Here's an idea:  Taxes should be raised only if they are efficiently spent, within a Congressional budget made out at the beginning of a given year, approved by independent auditors who verify the economics are actually feasable and not pie in the sky.  No California-style expectations for tax bases on the assumption that investments will generate the majority of the wealth to be collected for the next coming year, so spend everything on pork-barreling in the short-term, with a vengeance.  

Any emergency funds will be taken from a rainy day fund.  No exceptions to over-spending, with this following caveat...  If the politicians can't allocate it correctly, any non-emergency overspending is first collected from their salaries, personal assets, with garnished earnings into their retirement from office... prior to any approved deficit increases or raised taxes or bonds.  Those rainy day funds have to be rebuilt each year from existing levels of taxation, with priority over all coming year non-emergency issues, at a 20% replacement rate per year, till the auditors say it's a large enough security cushion.  Sort of a 'margin of economic safety.'

Give the politicians incentivization to be efficient with assets that belong to other people, as much as possible.  Give them negative incentives with enforcement clauses that assume they are in default, until they go to court to prove they are otherwise.  Kind of like a cop arresting you for suspicion of drunk driving.  You cross a line, (in this case running out of funds you should have easily allocated on the start of the new year) and the headache is on you to prove in a court that you are entitled to a return of your financial assets for mismanagement.  This would have the side benefit of changing some of the characteristics of those people willing to become politicians, as well.  You'd attract less of the sociopaths looking for the gravy trough, and more of the humorless, non-telegenic accountant and business types.  I'd say it would be a big improvement, and maybe something we could push for, after the inevitable financial disaster motivates main street to hopefully constructive change.

Thanks for taking the time answering these.  It helps round out my approaches and fine tunes my investing philosophy.

Keep on chewing, 


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#12) On February 28, 2010 at 10:09 AM, XMFSinchiruna (26.50) wrote:


Wow... that's a kindly barrage. It's Sunday and way too nice out for me to answer all of them, and besides most of the questions that I will skip are outside my core areas of expertise. 

On the IMF sales, it's crucial for long-term Fools to understand how little those 191.3 tonnes matter. They don't. The bullion is still unlikely to ever hit the market no matter which country steps up to buy, and even if no central banks bought it the quantity is wholly insufficient to quelch demand. And a $10 price move in gold is so small that we can't confidently tie it to that headline ... the dollar did fall a bit that night.

On your #1 above, I would say only this: talk to your broker. If they can't give you what you seek, shop around. I don't think you'll find much of anything available on weekends.

On #2, I have seen no such breakdown. You will find in several of my recent articles comparisons between performance of the GDX vs. GLD. The vast underperformance by GDX foretells of better days ahead for the miners. As for volatility, the general rule of thumb of course is to expect far greater volatility in mining shares. The 2008 decline is a poor example because of the liquidation panic that was in effect, but even during lesser corrections (like 2006), miners logged almost twice the percentage loss of the underlying metals before finding a bottom. The nice thing is, the converse is often true on the upside.

Ted Butler is the one I mentioned as dialed in to the silver market through that one article I posted. I don't track his work closely enough to state whether he is always as dialed in, but that article was right on the money. He has a good reputation among silver researchers, but in silver I rely upon no one, and conduct my own research.

Jim Sinclair does have that annoying tendancy to lock his sights on specific dates and predicting events without any explanation for how he arrives at those conclusions. I simply ignore that portion of his content. Strip that all away, and you still have someone that I consider the most knowledgeable individual in the world with respect to the dynamics of the gold market and the behavior of gold within a secular bull market scenario. His masterful understanding of currencies, derivatives, and debt ... and the information he gathers on his site ...  combine to create the ideal online resource for anyone that is long gold. Since he has predicted countless aspects of our current predicament years in advance, I think he deserves a pass for a few failed date-specific calls. If he could learn not to issue those types of calls, he would be more of a legend than he already will become.

The way to keep score for Sinclair's accuracy is through his "formula" that he released in 2006. He called the over-arching dynamics of this currency crisis event with complete precision.

I hear people mention this David Tice, but I honestly have not come across any of his work. I spend about 6 hours per day conducting research (aside from writing), so if I haven't encountered his work yet, he needs to imprive his circulation. 

As I mentioned previously, the best bet for anyone seeking exposure to Australian precious metal mining companies would be through the GDXJ.

As for books/sites on evaluating mining stocks, I have come across nothing of any quality. I've been thinking about an article series on the topic. Someone could do well writing a manual for pm investors, but that won't be me ... my preferred book topics are already mapped out.

As for options, since I don't use them, I know amazingly little about them.

I did actually sell some stock positions (about 10% of my portfolio) at $1,220 gold to raise cash, most of which I have already deployed to repurchase the same or similar stocks beneath $1,100. I can't speak to what would work for others given varying tax implications, but that sort of modest tweaking around an untouched core of long-haul positions has worked well for me since $500 gold. Same goes for transaction costs ... investors paying high trade commissions may not wish to share my approach.

On allocation, I too am most heavily weighted in intermediates, with minors coming in a close second. I am probably under-represented in major miners, and hope to have an opportunity to pick up some shares of my favorite in that space.

Again, I can't speak to the tax specifics for others, but for me having a healthy dose of physical bullion proxy exposure is a key element to a successful allocation in precious metals. Yes, the cap gains issue stinks, and I would love to see it challenged. As you know, bullion has far outperformed miners over the past several years, and my bullion proxy remains one of my top performers. I have pared it down a touch in favor of greater mining exposure now, but by no means have I considered removing that key element from my portfolio.

Interesting ideas on constraining government waste and malfeasance. :)

It's too nice out for me to type any more... Fool on!




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