Going for Gold! India Buys 200 tons of IMF Bling

Last week, the Reserve Bank of India (RBI) purchased 200 tons of gold from the International Monetary Fund (IMF) for $6.7 billion. The transaction increases India’s gold holding to the tenth largest among central banks, and brings India’s holding from 4 to 6 percent.  This is significantly less than the majority of the developed world, but quadruple China’s amount.  The IMF has agreed to sell 403.3 tons total, or one eighth of its stockpile.

One reason for the purchase may be India’s push for greater clout in world economic affairs.  As a $1.2 trillion emerging economy, India seeks larger representation in the IMF and has made promises to help shore up its resources for lending to developing countries.  Proceeds from the sale will help pay for discounted interest rates on loans to low-income countries, said the IMB in July.  The Washington-based institution plans to grant as much as $17 billion in extra loans to developing nations through 2014.   

Another motivation behind buying gold may be to diversify its foreign exchange reserves which are closely linked to the U.S. dollar.  As the dollar drops against other currencies, many emerging economies are showing increased interest in diversifying out of U.S. assets.   But India’s Finance Minister Pranab Mukherjee argued that the purchase doesn’t signify any loss of confidence in the dollar, or that the precious metal’s appeal is increasing. 

So how does this powerplay affect us?  This vast sum of gold was moved per an off-market transaction, taking place over 11 days at market-based prices.  This means that the IMF sale, while bullish for gold prices, has not directly impacted the physical market.  That said, the speculation surrounding such a major purchase certainly had a role in a spot price all time-high of over $1100 a troy ounce.  Another reason for the increase in price is that half of the gold is still left for sale, and that remainder could potentially be sold on the open market.  More pessimistic analysts speculate that these opportunistic buyers may be buying up the gold to prevent the IMF from dumping it on the market and depressing the price of gold. However, this assertion is unproven.  According to Bloomberg.com, Russia, China or Brazil are the most likely buyers for the rest of the gold.  Stay tuned to see who will purchase the remaining gold and how those diversified assets will affect the buyers’ economic clout.