Up $800 million on its IMF gold, India may buy the rest

Submitted by cpowell on 09:22PM ET Tuesday, November 24, 2009. Section: >http://www.mydigitalfc.com/plan/india-plans-buy-more-gold-imf-410

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 the 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.

On Tuesday, gold prices stood at $1,168, an increase of 12 per cent over the price RBI paid. The market value of the gold, as of Tuesday, thus stood at $7.5 billion -- indicating a cool gain of $800 million for RBI.

RBI holds its forex reserves in a basket of currencies expressed in dollar terms. It is able to earn only a nominal return on the dollar reserves.

In an article in the Financial Chroncile on November 4, Guild Investment Management CEO Monty Guild listed the merits of buying of gold. "It helps China and India more because their responsibility for financing IMF grows as they become powerful financially. It is a method to get IMF to self-finance in the short run and save China and India money," he wrote. Guild said that since most of the gold bought would be out of reach for the retail market, "gold prices will not get hammered."

Prime Minister Manmohan Singh on Sunday said there wasn't a substitute for the dollar yet. "My own feeling is that we have not entered an era of irreversible shift in the economic strength of the US," he said ahead of his visit to Washington.

On November 3, the day RBI bought IMF gold, Finance Minister Pranab Mukherjee told the economic editors' conference that the government wasn't preferential in its treatment toward either the dollar or gold. The buying of gold had a sentimental significance, as the government had to pledge gold with the Bank of England in 1991 to borrow money to maintain imports.

The IMF executive board had on September 18 approved the sale of 403.3 tonnes of gold -- one-eighth of the fund's total gold holdings -- half of which was eventually sold to India. Bank of Mauritius bought 2 tonnes, leaving 201.3 tonnes still with IMF. The limited sales are part of the IMF's efforts to put its finances on a firm footing and raise money to lend to low-income countries.