India wants another 200T IMF gold

If you were wondering why gold is up near $1,180/oz again this morning, India is said to be wanting the IMF’s remaining 200 tonnes of gold. This opens up the door for a bidding war with China – who’s also publicly wanting to increase their gold holdings.

From India’s Financial Chronicle:

India is open to buying more gold from the International Monetary Fund (IMF). It bought 200 tonnes for $6.7 billion on November 3. The Reserve Bank of India (RBI) may well buy IMF’s remaining hoard of 201.3 tonnes on acceptable terms, which are now under negotiation.

A government official said that the additional purchase would depend on the “successful pitching by RBI”. “RBI is an independent body, and the government does not interfere in its affairs. It will get the gold if its bid is successful and at the price it has offered,” said the official.

RBI did not respond to Financial Chronicle questions if it was bidding for the remaining IMF gold. The purchase of the first lot of 200 tonnes, RBI had said at the time, was a part of its foreign exchange reserves management operations.

Responding to query from FC, an IMF spokesperson said the gold sale process was still under way and “there is no fixed timetable for completing the sale”. Its spokesperson further said that “the fund does not wish to comment on discussions with individual members.”

RBI has good reasons to further enrich its gold reserves. In just three weeks it has been able to benefit by as much as $800 million on the investment of $6.7 billion it made in buying 200 tonnes from IMF.

Since 1999 RBI has been periodically valuing its gold reserves at “prices close to the market”. It has not done so since it purchased the gold from IMF.

RBI bought the 200 tonnes at $1,045 an ounce. The transaction, from IMF to RBI, involved daily sales that were staggered over a two-week period, October 19-30, with each daily sale conducted at a price set on the basis of that day’s market price.

Human Action again brings your attention to what increasing gold holdings by central bankers could do to the gold price; From David Rosenberg:

  • If India were to lift is gold share of FX reserves from 6% to 20%, where it was during the strong U.S. dollar policy days of 15 years ago, we estimate that gold would go to $1300/ounce.
  • If China were merely to copy what India just did and raise its share to 6%, then gold would go to $1,400/ounce, based on our in-house analysis.
  • If the USA were to go back to a 40% ratio of gold reserves to money supply (using the monetary base), where it was a century ago when the Fed was first created, from 17% currently, that would equate to three years’ supply of bullion, and alone take the gold price up to $2,750/ounce, based again on our research on price sensitivities to central bank buying activity.
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