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G-20 Summit and IMF gold

Indraneel Sen Gupta 
on 04 April 2009

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G-20 Summit and IMF gold
 
A $1.1 trillion deal to combat the economic downturn agreed at Thursday's G20 summit in London includes a trade finance package to fund $250 billion of trade over the next two years
We should at least l know what the G20 leaders agreed to. They've tripled the lending power of the International Monetary fund to US$750 billion. This is mostly in the form of creditor countries like Japan loaning the IMF money so it can loan it out to debtor countries like Mexico. Loans to make loans. They've also expanded by US$250 billion the IMF's Special Drawing Rights (SDR), which are an obscure but emerging kind of uber reserve currency. No one is really sure what this means yet or where it is taking us.
 
 
But trade has slumped in recent months, with Japan's exports halving in February from a year earlier. The World Trade Organisation (WTO) predicts a nine per cent drop globally this year, the first contraction in 25 years, reflecting both dwindling demand and the lack of credit to finance shipments. Stocks are up and gold and government bonds are down. That's the short story. It wasn't news, but the summit statement reiterated a plan floated by the IMF last year to sell 403 tons of gold. The IMF planned on doing this last year to fund its operating deficit. It's advancing the idea again to raise money. The world stock market zoomed to show that market is recovering from its collapsed phase.
 
The IMF may be selling gold. But we reckon a lot of people are happy to buy it. With the massive expansion in global stimulus, borrowing, and spending, we are approaching the next phase of this crisis. And we reckon when the G20 meets in New York again in September, they may not be smiling anymore. So it is well clear that IMF will sell but that will increase the supply of gold which will result to drop of the gold price. As the basic definition of economy goes more supply less demand.
 But I am sorry to say that this time this definition works opposite. Foreign exchange reserves of India and China slumped in January-February and both the countries may go for more accumulation of gold which may have an impact on the global bullion markets. Even as recession is wreaking havoc across economies, more and more countries, especially Asian economies, are moving to gold as reserves.
 
Moreover if you sell gold to make profit at higher prices then you will convert the gold into any currency form. And as the world currency market is going on all major currencies are in downward form. So that will results to negative growth. Hence the selling of gold by the buyers is not taking place. They are keeping it as a safe investment tool. Another fact which we should keep in mind is that US and Europe along with other economies are printing money for the huge bailout plans decided by them .So when we print money we have to sell gold in equivalent amount. This printing money will increase the inflation in the coming days where again gold will be used to as a tool to hedge against inflation. So gold have more upward rally in future.



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