India buys gold from the IMF

India buys gold from the IMF

FT.com Published: November 3 2009 09:18 | Last updated: November 3 2009 16:00

Most investors make a virtue of diversification. But when the asset holder is a central bank, and the assets in question are US Treasuries, few like to shout about it. Tuesday’s curt announcement from India’s Reserve Bank that it was swapping $6.7bn of dollars for 200 tonnes of gold from the IMF’s vaults did not mention the D-word. The exercise was described simply as “reserves management.” Move along, nothing to see.

True, this is modest, in the context of a $286bn foreign exchange pool, Asia’s fourth-largest. It raises the share of gold from 3.6 per cent of reserves to just over 6 per cent. And it is opportunistic, as much as strategic. After years of net selling, other central banks have started to sit on their bullion. GFMS, a precious metals consultancy, forecasts net sales of just 50 tonnes this year – the lowest total since 1988. The IMF, which announced plans to offload 403 tonnes in September, is the only big seller around.

But the exchange is telling nonetheless. Since a balance of payments shock in the early 90s, the RBI had been steadily offloading its gold. The reversal of that trend burnishes the yellow metal’s ’ credentials as the ultimate reserve currency. The decline in the dollar, down 15 per cent since March against six major currencies, is neatly mirrored by a 15 per cent rise in gold. RBI governor Duvvuri Subbarao may have asked himself a simple question: will the supply of gold rise as fast as the supply of dollar assets? Answer: almost certainly not.

The unmasking of a new, deep-pocketed buyer took the gold market by surprise, pushing spot prices to within a whisker of the record nominal high of last month. But for the RBI, the push from the dollar was probably stronger than the pull from gold.

BACKGROUND NEWS

The International Monetary Fund has sold 200 metric tonnes of gold to India’s central bank, making $6.7bn which it will use to shore up its long-term finances and subsidise loans to poor ountries. India’s central bank is the first to buy from the IMF since the Fund put 403.3 tonnes of its stockpile up for sale in September. The IMF made more money than it initially expected, selling the metal to the Reserve Bank of India gradually over the past two weeks at an average market price of around $1,045 an ounce.

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