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Golden sale heralds economic force Add to ...

A surprise move to snap up $6.7-billion (U.S.) of gold underscores India's economic ascendance and marks the strongest indication yet that the central banks of Asia's fast-growing nations are turning away from the U.S. dollar as the world's reserve currency.

The price of gold leapt to an all-time high as the decision to purchase 200 tonnes of gold from the International Monetary Fund highlighted the resilience of India's economy while laying bare a growing loss of global faith in the value of the U.S. dollar.

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Already the world's largest gold importer to fuel its massive jewellery consumption, the gold deal marks a major milestone for India and its standing in the global economy.

Gold hit a record $1,088.50 (U.S.) an ounce as investors bet that Asia's emerging economic powers will buy more of the precious metal to diversify their foreign-exchange reserves against a weakening greenback."We have money to buy gold. We have enough foreign-exchange reserves," Pranab Mukherjee, India's Finance Minister, told reporters yesterday.

While India has enjoyed relatively strong economic growth in the past year, "Europe collapsed and North America collapsed," Mr. Mukherjee said.



The Indian government has recognized it has a huge U.S. dollar reserve pot and the domestic interest may be to have more gold. DundeeWealth chief economist Martin Murenbeeld


Less than two decades ago, a crushing financial crisis forced India to physically ship its gold reserves to London as collateral for an IMF loan. Now, with an economy that is expected to grow by 6 per cent this year, India is helping the IMF shore up its finances by buying a big chunk of the organization's gold.

"The Indian government has recognized it has a huge U.S. dollar reserve pot and the domestic interest may be to have more gold. There is a certain amount of confidence that comes with gold, particularly in India," said DundeeWealth chief economist Martin Murenbeeld.

Western central banks have hoarded gold for years as part of their foreign reserves and now India and China are emerging as significant bullion buyers as they try to spread out their exposure to U.S. dollar-denominated investments such as bonds and treasury bills.

"As these countries are growing and becoming more important players, they are recognizing the value of defending your currency and having it backed, to a certain amount, by gold," said Charles Oliver, a portfolio manager with Sprott Asset Management Inc.

India's move also amounts to a bullish call on the long-term price of gold. India paid the IMF $6.7-billion (U.S.) to increase its gold reserves to 557.7-million tonnes from 357-million tonnes. Gold now accounts for about 6 per cent of India's $285.5-billion in foreign-exchange reserves, up from 4 per cent.



As these countries are growing and becoming more important players, they are recognizing the value of defending your currency and having it backed, to a certain amount, by gold. Charles Oliver, Sprott Asset Management Inc.


That's still relatively low compared to most European countries, where gold makes up about 15 per cent of reserves. Despite Canada's status as a major producer and home to some of the world's largest gold-mining companies, gold accounts for less than 1 per cent of Canada's reserves.

India is already the world's largest consumer of gold, accounting for about 20 per cent of global demand. It imports between 700 and 800 tonnes every year for use in jewellery.

As recently as 1994, gold accounted for more than 20 per cent of India's foreign reserves, but the South Asian country's increasing investments in U.S. treasuries and other greenback- denominated securities diminished gold's standing in the portfolio.

India's decision to purchase half of the 403.3 tonnes of gold the IMF put up for sale in September surprised many gold-market observers. China, whose $2.2-trillion in foreign reserves are the world's largest, was widely expected to snap up the bullion.

China has increased its gold reserves by 76 per cent since 2003 to 1,054 tonnes. It has publicly stated its intention to diversify its foreign-exchange reserves with investments in "hard assets," including commodities such as copper, oil and gold.

Gold currently accounts for only 1.7 per cent of China's foreign reserves, making it a front-runner to buy the remaining 200 tonnes of IMF gold still up for grabs.

"Who buys the rest of the IMF gold? We suspect it may be China, other Asian countries, Russia or even India again, as they hold relatively little gold relative to their very large FX reserves, and may want to diversify away from the U.S. dollar," Bart Melek, global commodity strategist at BMO Nesbitt Burns, said in a report.

India's willingness to buy a massive amount of gold near record prices helped the bullion price smash through its previous all-time high of $1,072 an ounce, hit last month. Gold for delivery in December touched $1,088.50 an ounce in New York yesterday.

"Gold is sneaking back into some kind of a role in the international monetary system ... the central bankers are indicating, particularly ones that have large amounts of foreign-exchange reserves, that they are very comfortable holding such a historic asset as gold," Mr. Murenbeeld said.

***

The gold standard

Percentage of total foreign reserves held in gold, by selected countries

U.S. - Gold, in tonnes 8,133.5

France - Gold, in tonnes 2,445.1

Germany - Gold, in tonnes 3,408.3

Italy - Gold, in tonnes 2,451.8

Netherlands - Gold, in tonnes 612.5

Switzerland - Gold, in tonnes 1,040.1

European Central Bank - Gold, in tonnes 501.4

India - Gold, in tonnes 557.7*

Russia - Gold, in tonnes 568.4

Japan - Gold, in tonnes 765.2

China - Gold, in tonnes 1,054.0

Canada - 0.2 % Gold, in tonnes 3.4

*Adds 200 tonnes to India reserves

THE GLOBE AND MAIL / SOURCE: WORLD GOLD COUNCIL, SEPTEMBER 2009

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