India Buys Gold; Indians Don't

How the Reserve Bank of India's 200-tonne IMF gold purchase contrasts with private Indian dealing...

WITH THE Indian central bank, the Reserve Bank of Indiam buying 200 tonnes of IMF gold at $6.7 billion, speculation is rife that the bank must have sold US Treasuries bills to grab the yellow metal, reports Commodity Online from Mumbai.

According to a report in the Economic Times, India's leading business daily, the RBI may have sold US Treasuries to fund its gold purchase from the International Monetary Fund. This purchase would suggest the Indian monetary authorities are seeking to change the composition of their foreign reserve holdings, most likely diversifying away from US Treasury bonds, the report said.

Such a move would be prudent, as India needs liquid assets to hold as a buffer against sudden, destabilizing capital outflows. The central bank, however, refrained from disclosing the details of the transaction in its weekly statistical supplement released last Friday.

According to the RBI release, total foreign exchange reserves including gold and SDR (special drawing rights – the notional "reserve currency" held by central banks at the International Monetary Fund) dipped by $1.129 billion to $284.4 billion during the week ended October 30.

India concluded its "off market" purchase of IMF gold that day, after two weeks of steady buying at "market-related" prices averaging around $1045 an ounce. While foreign currency assets dipped by $1.580 billion, the value of SDRs dipped $25 million. The value of gold in reserves rose $484 million to $10.8 billion.

So going by the current composition of reserves comprising various foreign currency assets, SDRs, Gold Bullion and reserves with the IMF, gold – which is valued at the month-end bullion prices at the London Gold Fix – has for long hovered around $10 billion and roughly accounts for 4% of the total reserves. But had last month's purchase been reflected in the latest reserves figures, the value of gold would have gone up by at least one half to 6%.

One would also know how the central bank had funded this purchase if the latest weekly report acknowledged the move. According to an RBI official, however, the purchase was out of the foreign currency assets and not SDRs held at the IMF – the most obvious "swap this for that" route to buying IMF gold.

Outside the Reserve Bank of India, however, gold traders in India are afraid of the Gold Price these days. The big news of India buying 200 tonnes of gold from the IMF sent the yellow metal to dizzy new heights against both the US Dollar and Indian Rupee last week. Gold traders say the record jump in prices has sent the bullion market across the country to silence.

"There is no buying happening at these high Gold Prices. Customers are coming to jewelry shops to sell old gold, not to buy new gold ornaments and Gold Coins. Everyone feels that this is a market to sell, not to buy," says Sanjeev Srivastava, a gold trader in Mumbai's Zaveri Bazaar.

According to Srivastava, scrap gold sales are zooming in India thanks to the record price rise in the yellow metal. "At least 10 tonnes of scrap gold must have been sold in the Mumbai bullion market this week. People are cashing in on the bull market in gold," he said.

Srivastava, who used to supply at least two tonnes of gold each week to various jewelry shops across India, says jewelry chains are holding on to the old stocks as there is hardly any buying from private consumers. "Only parents whose daughters' marriages are fast approaching are the ones who are Buying Gold these days.

"Indian gold investors are keeping away from the Bullion market as the prices are very high," he adds.

Indian Gold Prices touched a record 16,677 Rupees per ten grams last week in Mumbai markets. On Friday, a strengthening Rupee and dull buying pulled Gold Prices down a little to 16,567 per ten grams.

Karan Khan, another bullion dealer, said that the volume of people Buying Gold will pick up during the current wedding season in India, expected to last till December's end.

"By that time, I feel Gold Prices might fall from the record prices that we are seeing these days," Khan told Commodity Online.

On Friday, the Indian rupee strengthened to its highest in more than a week as currency traders sold dollars on gains in the local sharemarket and watched the US dollar movements.

Back in the official sector, Dubai-based bullion analyst Mark Robison says "It is a surprise that India has jumped in the first place to purchase the IMF gold. India is the largest [private] marketplace for gold in the world. I think by buying IMF gold, India has shown increased interest in diversifying out of US assets as the Dollar loses value against other currencies."

China is the world's biggest gold producer. In April, China said it had increased its reserves of gold by 76% over the previous six years to 1,054 tons.

The IMF has kick-started its gold-selling plan by divesting the first tranche of its 2009 gold sale to India's central bank. The gold sales were conducted daily over a two-week period from Oct. 19-30, to "give some protection to short-term fluctuations in the market."

The sale is part of an agreement struck in September among IMF member countries to sell 403.3 tonnes of the fund's gold stocks to diversify its sources of income and to increase low-cost lending to poor countries.

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