London, 9 November 2009 

Gold prices briefly broke above the $1,100/oz levelintra-day on Friday, November 6. Gold’s near-term direction now seems to be squarely in the hands of the central banks following news that the Indian central bank has bought 200 tonnes (t) of the proposed IMF 403.3t sale, according to Morgan Stanley.

"The upside price benefits of rising expectations that central banks are shifting from net sellers to net buyers, were reinforced last week by another dovish FOMC meeting, a rise in US unemployment to 10.2% and the continuing commitment to economic stimulus by the G20 Finance Ministers," says Peter Richardson. 

"These have increased the prospect of a more protracted period of USD weakness, heightened medium-term inflationary risks, and are the key upside risks to our $1,000/oz base case forecast for gold in 2010. India's surprise purchase of 200t of IMF gold was bullish in two ways: quickly removing half of the IMF’s 403.3t of announced sales as well as raising the chance that entire remaining supply could be sold off-market with China still the most obvious potential purchaser."

In Morgan Stanley's view, China is still the obvious purchaser of the remaining IMF gold. China may be interested in continuing to acquire gold, both to diversify its reserves, and to support the RMB as a global currency. The remaining IMF gold would raise Chinese holdings by as much as 19%, based on the 1,054t of Chinese reserves reported in April, still well below the levels in the Eurozone and US. However, China has become the world's largest gold producer and has the ability to buy its own gold and reduce the risk of exposure to the "market prices" that India was forced to pay for its 200t.

"As such, the higher gold prices rise, the less likely China will be interested in IMF gold, in our view, and the less likely the remainder of the sales will be completed “off-market” in 2009-10. Nevertheless, given the reduced IMF overhang and continuing fiscal and monetary stimulus policies, the market may rise even without Chinese buying."

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