Indian gold purchase drives price towards $1100 - and maybe higher.

Now the reality of the potential impact of the 200 tonne Indian gold purchase from the IMF has begun to sink in gold has been accelerating towards its next big target of $1,100.

LONDON - 

As we predicted yesterday (see: India dumps dollars for IMF gold - is China next in line?) after an initial hiatus, once the reality of the Indian purchase of 200 tons of IMF gold sunk in the gold price leapt up and today has been trading, so far in the $1,090s before profit taking took it just back below this level, well on the way to what many analysts had predicted as their top gold price target for the year of $1,100.

It was indeed surprising to this observer that the initial reaction to the Indian news had been so muted and had hardly moved the gold price at all.  But once the full implication of the IMF statement, which has been interpreted by many to suggest that the rest of the IMF designated gold for sale will also be taken up off-market, was read in more detail the market began to take off.  A little profit taking ensued overnight and early today in some markets, but then the metal resumed its upwards path.  There has to be a chance that $1100 will be breached soon - indeed by the time this article is read it may already have been - which could suggest a $1,200 target for the year, or higher if the price really picks up momentum.

If all the IMF gold for sale is taken up by Central Banks, this in turn helps make the point that they are unlikely to be serious sellers over the next year or so.  This then promises to provide a major fillip for a gold market which has always suffered from the fear of official sales interfering with a free market growth pattern

But it's not only the Indian gold purchase which is driving the price upwards.  The dollar remains weak - almost to the extent that some analysts feel it is due a rebound, although this is probably not justified on strict financial grounds - and there remains considerable nervousness on the progress of the general stock markets despite, or perhaps because of, their big rises over the past few months.  There are still plenty of doom merchants out there pointing out that stock market gains are not justified by reality and can only continue as long as governments keep fuelling their economies by pumping out more and more fiat money.

However, to counter this, politicians have in the main been successful in talking up weak economies and there could yet be some life in the markets between now and the year end.  New Year euphoria may keep markets positive early next year too, but on current indicators the true state of the global economy may prove to make markets vulnerable unless the perception that all is well and growth is back can be maintained until it really is! 

There are, though, parallels with the 1929-30 period and beyond, although the globalisation of the markets and the rise of the BRIC economies and other LDCs with their new potentially huge developing internal markets should make this recession more shortlived than that of the 1930s.  But whether this will prove to be the case is still in doubt.

One recalls vividly a comment by Ian McAvity to a gold oriented audience in New York last May - "Be careful what you wish for!"  A collapsing global economy and diving dollar may well be good for gold, but can be the trigger for events which make life far more uncomfortable for everyone.  Remember the rise of Adolf Hitler, Fascism and the Second World War - which were almost certainly a direct result of the impact of the Great Depression on Europe!

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