More about IMF than about RBI: Financial Express: November 5, 2009

How important is a transaction of 200 tonnes of gold from an economic standpoint? At the moment, we have a case of the IMF selling gold and RBI purchasing the same at a value of around $6.7 billion.
There is another lot of gold (of similar amount) which will also be up for sale soon. Such transactions are not very common, but at the same time do not have any shock value. To begin with, there was some movement in the gold market, which stabilised subsequently. The last time the IMF had indulged in such a sale was in 1999-2000 when Mexico and Brazil were the purchasers. Still, this transaction is quite interesting for several reasons.
First, the sale of gold by IMF is significant because it evidently means that the Fund needs money to carry out its operations. They have tried to get members to supply funds but the sale of gold, which would otherwise have been residing in their lockers, is probably a prudent step. We are told that China may be the potential buyer for the second lot. Hopefully the money generated would be used for its core purpose—correcting imbalances in the balance of payments of countries. The IMF has come under scrutiny of late for losing its relevance at a time when global capital flows have taken care of forex issues of several countries.
Did the IMF get a good deal? The answer is yes, because when they had thought up this plan, the price was around $850/ounce. This means that the sale at $1,045 is a bonus of just over 20%.
Second, from our point of view, this purchase can be taken with a sense of pride, since we are increasing our gold reserves. In terms of share in forex reserves, as per latest
RBI data, such a shift would mean an increase from 3.6% to 6%. But, does this mean anything significant? Not really.
We have actually purchased gold at a time when the price has crossed the psychological $1,000/ounce barrier.
Therefore, the timing may not have been very appropriate. In case the RBI was keen to augment its gold reserves, there could have been savings by buying in the market as a Treasury activity. It appears that it has entered the fray merely because the gold was up for sale by the IMF. It would be useful if the RBI periodically evaluates the mark-to-market holding on to these additional gold reserves.
Third, will the bullion market be impacted? It was affected to a certain extent when the news came out that the IMF was selling gold. But, it should not really matter because this entire transaction doesn’t affect the markets—gold was merely moving out of the IMF’s vault to RBI’s locker. Nobody should have been affected by such a transaction and thus, besides the initial reaction, there have not been significant reverberations.
To the extent that there have been, it is based more on what will happen, or rather who is to buy the remaining 200 tonnes. Further, with average daily volumes of around 500 tonnes a day on COMEX, this quantity is not really significant as such. The good news here is that such bilateral sales are price neutral, which would not have been the case, in case the IMF sold actively in the market.
Fourth, there are implications for the dollar, which is serious. The fact is that nations are looking at alternatives to the dollar given the way in which the US economy has been functioning and the dollar weakening. There has been talk of countries moving over to the euro, which is considered to be stronger. The preference for gold is a corollary. However, with the IMF not expected to go beyond the 400-tonne level, there may not be too much to this transaction in terms of broader implications for the dollar.
Fifth, the decision for the IMF and countries like India to deal with gold is also slightly anomalous because the world economy had actually moved out of the Gold Standard after the Depression of the 1930s. The hope when IMF was created in 1944 was to move away from metals to currencies and the SDR came into being for this purpose. Going back to gold, which hopefully will not be a habit, does sound a bit anachronistic.
One may recollect that India had to pledge gold way back in 1991 when our forex reserves had declined and then had gone to the IMF for a loan. The IMF is not in a crisis situation but certainly requires liquidity. It is ironical that India is actually providing IMF with cash now, thus reciprocating an exchange from 18 years ago.