Behind India's Big Gold Buy

We saw it coming and got it wrong at the same time. But at this price, it’s hard to complain… $1,092 an ounce this morning, another record high for gold.

Gold Price Rise

Back in September, the IMF announced it was selling a boatload of its gold reserves in order to finance its global interventions. We thought China might be a big (if not the only) buyer of the 400 tons for sale, and that any leakage of the transaction could make a big wave in the dollar and gold markets. We were right about the market… wrong about China (for now).

India, it turns out, ended up being gold’s white knight. The world learned yesterday that India had bought 200 tons of the IMF’s gold over a two-week period in October, at an average price of $1,045 an ounce. That’s a 57% increase in Indian gold reserves… quite a statement.

“The Indian transaction may be the largest single central bank purchase of gold ever,” notes Byron King. “The only comparable event was the U.S. government seizure of gold from circulation within the nation back in 1933, along with steady U.S. government purchases in the 1930s and 1940s.

“I e-mailed an acquaintance of mine who works in the ‘financial’ side of the U.S. government — I cannot say what Cabinet department, but his office has a view of the White House. I asked why the IMF sold the gold to India, and not China.

“My acquaintance replied, ‘It’s all about balance. India holds a lot of U.S. Treasuries and needs gold to diversify its assets. We can’t let all the IMF gold go to China and leave India in the dust. China is already building up its gold reserves due to being the No. 1 gold producer in the world and still a net importer. Besides, if the news hit the wires that China just bought all the IMF gold, it would crush the dollar. So the deal was that India could buy 200 tons.’”

(By the way, have you checked out Byron’s latest report on precious metals investing? Lots of gold notes in there, for sure, plus one shiny metal he thinks is “even better than gold.”)

Also of note, India bought the IMF gold with SDRs — special drawing rights currency that is a combination of dollars, euros, yen and pounds.

Perhaps the IMF didn’t want to take on the burden of 7.4 billion U.S. dollars. Or maybe it was a political favor from India to the U.S., as this note from BNP Paribas portends: “By using SDRs, the Reserve Bank of India left the impression that it does not like paper currencies in general, suggesting that other major Western currencies were not seen as any better than the USD.”

If you recall Addison Wiggin’s and Chris Mayer’s recent trip to the Indian gold markets, this should all make sense. The majority of Indians have little faith in their own financial system, so when they have money sitting around they wish to save, Indians buy gold jewlrey. The Reserve Bank of India probably feels the same way about the worlds biggest banker — the Federal Reserve.

We’ll ask our Indian colleagues Ajit and Rahul for their thoughts — stay tuned.