India may buy still more gold from IMF

By Abhrajit Gangopadhyay and Elisabeth Berhmann
The Wall Street Journal
Tuesday, November 3, 2009

http://online.wsj.com/article/SB125722876971624729.html

NEW DELHI -- India's central bank bought 200 metric tons of gold from the International Monetary Fund last month, in the first major move by a leading central bank to diversify its foreign-exchange reserves.

Analysts said the move is potentially bullish for gold, but it is by no means the start of a significant shift away from U.S dollar holdings.

The Reserve Bank of India said in a statement that the move was part of its foreign-exchange reserves management operations.

"I would have advised the governor of RBI to buy gold as our forex reserve is comfortable. The RBI has done just that. That doesn't mean we don't prefer dollar any more or like gold any better," Indian Finance Minister Pranab Mukherjee said.

"The purchase won't trigger a substantial mismatch in asset holdings of the RBI. Dollar will continue to be a significant part of foreign-exchange holdings, as most of India's external debt is in dollars. The gold buying, as of now, seems just an asset diversification strategy," said Sonal Varma, an economist at Nomura Financial Advisory & Securities in Mumbai.

A senior finance ministry official said the central bank may seek to buy more gold from the IMF directly. "It makes sense to buy gold as it will appreciate more than the U.S. dollar," he said.

The purchase of nearly half of the 403.3 metric tons of gold earmarked for sale by the IMF boosted spot gold in Asia, reminding investors that central bank reserve diversification will continue to fuel demand for the yellow metal in the open market.

The off-market deal also reinforced the view that little or none of the IMF gold may eventually reach the open market, limiting any bearish impact such a big sale may have had otherwise.

The RBI bought the gold over a two-week period between Oct. 19 and Oct. 30, an IMF statement said. The $6.7 billion proceeds from the sale indicate an average estimated price of $1,045 a troy ounce, far higher than IMF's projection of $850/oz a few months ago, when its executive board approved the sale.

Sue Trinh, currency strategist at RBC Capital in Sydney, said the announcement supported the view that central banks are actively looking for ways to diversify their reserves away from the dollar.

The RBI is "still a buyer at current high-price levels, indicating gold is likely to move up further. This is positive for the market," said Kunal Shah, an analyst at Nirmal Bang Commodities in Mumbai.

The IMF declined to comment on potential buyers for the remaining amount, but said it is still in "an initial period to sell gold directly to central banks and other official holders that may be interested in such sales."

There has been speculation that Chinese and Russian central banks may also be interested in buying gold directly from the IMF. Open market sales will be conducted only if any gold is left after the "initial period" and "the Fund will inform markets before any on-market sales commence," the statement said.

The news boosted gold prices in Asia, pushing up the December gold contract on India's Multi Commodity Exchange to a record high of 16,325 rupees ($348.71) per 10 grams.

"Central banks have switched from net sellers to net buyers. Over the last few years, gold [exchange traded funds] have become a major presence in the market. Gold's investor base is broadening, which is positive for gold," said Janet Kong, managing director at Goldman Sachs' commodities investment research division in Hong Kong.

Gold holdings in the SPDR Gold Trust, the world's largest gold ETF, have reached 1,103.52 tons, making SPDR the seventh-largest gold holder, placing it ahead of Switzerland.

"Diversification has been an ongoing story for Asian central banks, and gold is one of the possible diversifiers. Gold holdings in comparison to dollar holdings are low," said Westpac Senior Commodity Analyst Justin Smirk.

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