The International Monetary Fund has sold 200 tonnes of gold to the Reserve Bank of India for $6.7 billion, quietly executing half of a long-planned bullion sale that has threatened to slow gold's ascent. The deal, which surprised traders who expected China to be the most likely buyer, will relieve the gold market of some uncertainty over how and when the IMF would sell 403.3 tonnes of gold, about one-eighth of its total stock.
The deal will increase India's gold holdings to the tenth largest among central banks. It also fuelled speculation that other governments - including Beijing - may be ready to diversify their reserves even at near-record gold prices, helping soak up IMF supply that the fund may otherwise be forced to sell on the open market.
"Central banks in India and China will be happy to accumulate gold at these levels. I will not be surprised to see even some Southeast Asian banks buying gold," Aaron Smith, Asia head of the $1.65 billion technical trading fund Superfund, told Reuters. Spot gold prices earlier rose by nearly one percent, but later reversed those gains to trade little changed at around $1,058 an ounce on Tuesday, within striking distance of last month's $1,070.40 record despite a rallying dollar. Traders said the IMF news could add to the market's upward momentum.
"Its potentially bullish from several points of view," said Commerzbank analyst Eugen Weinberg. "Gold was kept off the market and sold directly to central banks so potential sales on market are limited by this." "Secondly, it showed large buyers are ready to accept the current price levels. Thirdly, the central banks are increasing their gold reserves. Last but not least the central bank gold agreement sales of 400 tonnes ... is half empty already."
The Reserve Bank of India said the purchase was an official sector off-market transaction and was executed during October 19-30 at market-based prices. An IMF official said the sale was concluded at an average price of about $1,045 an ounce and that the transaction would be paid in hard currency and not in IMF Special Drawing Rights.
SURPRISE BUYER: Although the IMF's plan to sell a share of its gold holdings in order to increase low-cost lending to poor countries had been flagged for a year before it was formally approved in September, the speed, scale and identity of the buyer were a surprise. "It was always thought that some of it would be sold off market but it was a bit of a surprise that as much as 200 tonnes had been sold off market," said Simon Weeks, director of precious metal sales at Bank of Nova Scotia.
Although India is the world's biggest consumer of gold, primarily in the form of jewellery and investment among its billion-plus people, its central bank had given few signs of seeking to diversify its reserves pool into bullion. The proportion of gold as part of its total foreign reserves has fallen from over 20 percent in 1994 to just under 4 percent.
India's foreign exchange reserves held at the central bank totalled $285.5 billion on October 23, of which gold comprised just over $10 billion. The latest purchase will lift its share of gold holdings from near 4 percent to about 6 percent, much less than most of the developed world but four times China's share. The RBI does not officially talk about its diversification strategy. On Tuesday, the RBI said the purchase of IMF's gold was done as part of its foreign exchange reserve management.
But there may also be a geopolitical motive behind the deal: India, like China, is also seeking closer ties with the IMF to assert its authority on the global economic stage. "This transaction is an important step toward achieving the objectives of the IMF's limited gold sales program, which are to help put the fund's finances on a sound long-term footing and enable us to step up much-needed concessional lending to the poorest countries," the IMF's managing director, Dominique Strauss-Kahn, said in a statement on Monday.