At the end of October the I.M.F. had 32.7 tonnes of gold left to be sold. In September they sold 32 tonnes of gold and in October 19.5 tonnes, in the open market. Should they continue selling at the pace of September then we would expect to hear the announcement in December and probably in the first half of December. If they continued the slower pace of selling of October then we will have to wait until January 2011 for the announcement. We believe that this is significant because it will signal the real end of "Official" selling of gold. The signatories of the Central Bank Gold Agreement, with the exception of small deals in coins have not sold for over a year now. With the completion of the I.M.F. sales the annual 400 tonnes of 'official' selling will not be available to the market.

We believe they have stopped selling as we look back on their activity in the last year. We accept that they still have a 'ceiling' of 400 tonnes sales a year, but this is now simply a gesture. Central banks are solid buyers, primarily taking up their own local supplies first. We have to consider that more and more gold producing countries may well buy their own local production further reducing the supply of gold to the London and other markets.

We should also now accept that the main driving force behind the gold price rise is from central banks, with other investment demand following.

Investment demand changes

At this point we should again be careful to note that more and more investment demand not only from Asia but in amongst the Western institutions, is not with a profit in mind. Their investments are becoming more and more because of the instabilities and uncertainties that surround the developed currency world. It is becoming more and more difficult to value assets internationally with currencies swinging backwards and forwards as they are now. Gold is a better place to hold wealth in these stormy days.

All from the head of the World Bank down are also aware of the useful role that gold can play in acting as a 'value reference point' Should this happen gold will have returned to the world of money in real terms, albeit in a slightly different role to the one it had in the past. We termed this in earlier issues of the Gold Forecaster as gold no longer being a 'means of exchange', but as a 'measure of value'

What happens to demand with a 400 tonne drop in supply?

A 400 tonne drop in supply in a balanced market will pressure the demand side to find more gold.

• With mine supply pretty inelastic there will be only a small additional flow from that source.
• With jewelry demand in the developed world back to former levels, only much higher prices will deter them.
• With industrial demand [particularly electronics] now a necessity, demand is unlikely to be deterred by higher prices.
• With demand in India after an excellent monsoon and good harvests and GDP growth at 8.9% Indians are keen to buy at these prices and will not be deterred except by sharply higher prices.
• With the Chinese middle classes expanding rapidly as that country continues to develop, demand from there will continue to grow and most likely irrespective of the rising gold price.
• Central Bank demand is unlikely to abate no matter what the price, because their interest is solely in acquiring tonnages of gold. We note that as part of their ongoing program of gold buying Russia also bought 18.66 tonnes in October [against the I.M.F. sale of 19.5 tonnes]. Not only are they buying local production but are present in the open market.

Consequently, the only additional source of supply will have to be scrap supply or supply from current holders. So we ask, "At what price will current holders sell?

Scrap supplies the only source left, but at what price? Subscribers only - Subscribe through www.GoldForecaster.com