Gold hits new high on India deal – India buys 200 tons gold from IMF

More than 18 years after New Delhi pawned 67 tons of gold to tide over a balance of payments crisis, the Reserve Bank of
India has bought thrice that amount of gold from the International Monetary Fund to diversify its assets.

The IMF on Monday announced the sale of 200 metric tons of gold to the RBI, saying it represented almost half of the total sales volume of 403.3 metric tons that was approved by the Fund’s Executive Board in September.

Welcoming the purchase of 200 metric tons of gold by India’s RBI, IMF MD Dominique Strauss-Kahn said, “I strongly welcome this transaction with RBI.”

“It is an important step toward achieving the objectives of the IMF’s limited gold sales program, which are to help put the Fund’s finances on a sound long-term footing and enable us to step up much-needed concessional lending to the poorest countries.”

For India, the purchase, apart from signaling that its economy has come full circle, is a way of spreading its assets which are said to be currently over-weighted with foreign currency, mainly in the form of sovereign US Treasury bonds. In other words, it is a hedge against a falling dollar.

India is the world’s largest private gold consumer, but the government’s holding of gold as an asset is modest. Even so, the latest purchase puts it at Number 10 among the list of top 10 gold-holders in the world.

Of India’s current foreign exchange reserves of nearly $285 billion, foreign currency assets account for more than 90% ($268.3 billion), followed by gold ($10.3 billion), IMF’s Special Drawing Rights ($5.2 billion) and a reserve position in the IMF of $1.59 billion.

While India’s current gold holdings, accounting for just 3.7% of assets, are said to be historically low, buying 200 tons in addition to the 358 tons it already holds is expected to bump up the gold reserves to more than 6%. The dash to gold is prompted by the unsteady dollar and countries such as China, Russia and Brazil have already gone this route.

Commenting on the purchase, finance minister Pranab Mukherjee said, “It doesn’t mean we don’t prefer the dollar any more or like gold any better.” Recalling the embarrassment of 1991, when India was forced to mortgage a part of its gold reserve, he said that when RBI recently asked whether it should invest in gold, he told the central bank it could do so to bolster the reserve. An RBI statement said the purchase of gold was made as part of the bank’s foreign exchange reserves management operations.

The IMF said the transaction, which is in the process of being settled, involved daily sales that were phased over a two week period during October 19-30, 2009, with each daily sale conducted at a price set on the basis of market prices prevailing that day.

Officials said the total sales proceeds are equivalent to US$ 6.7 billion at an average gold price of $ 1045 per ounce.

India’s gold trauma occurred in the summer of 1991, when faced with dwindling foreign exchange reserves and a possibility of a default on payments, the government hocked 47 tons of gold to the Bank of England and 20 tons of gold to the Union Bank of Switzerland to raise $ 600 million.

The move helped tide over the balance of payment crisis, and also kick-started the reforms process when the next Prime Minister, Narasimha Rao, appointed Dr Manmohan Singh as the finance minister.

The price of gold has touched an all-time high after a large sale of the precious commodity by the International Monetary Fund (IMF) to India.

Gold struck a high of $1,095.05 an ounce in London, against $1,084.50 late in New York on Tuesday.

Buyers moved in after the IMF decision to sell 200 tonnes of gold to India’s central bank.

Gold and other commodity prices have surged recently as investors have moved away from the US dollar.

Spreading risk

The sale to India was nearly half the 403.3 tonnes of gold the IMF has targeted for sale over the coming years.

“The question now is, who buys the rest of the IMF gold?” Bart Melek at BMO Capital Markets said in a note to clients.

“We suspect it may be China, other Asian countries, Russia or even India again, as they hold relatively little gold relative to their very large foreign exchange reserves, and may want to diversify away from US dollars.”

The price of gold is typically strong in the October to December period because of the higher demand for jewellery in the run-up to Christmas and the Indian festival of Diwali.