India's Gold Purchase - The Facts:
The announcement of the sale of 200 of the 403.3 tons of gold at an average price of $1,045 is, we believe, the first of a minimum of two announcements that will see the 403.3 tons completely sold.
The Reserve Bank of India said the purchase was an official sector off-market transaction. The transaction, which is being settled now, involved daily sales, phased over a two-week period during October 19–30, with each daily sale conducted at a price set on the basis of market prices prevailing that day.
The Reserve Bank of India may buy more gold from the International Monetary Fund if it offers to sell the precious metal, a senior finance ministry official said.
The total sales proceeds are equivalent to $6.7 billion. Payment is expected to be in major currencies that make up the SDR. Please note that it will not be made in just the U.S. $.
- The sales are establishing a good short-term average price, so as not to leave the IMF or India open to the accusation of selling too low or too high. Inside India, gold buyers across the country have to be made aware that their central bank feels these to be good prices. We expect a pick-up in Indian retail buying because of this consequential feeling of security in buying gold at these prices.
- The R.B.I. will buy more "if it [the IMF ] offers to sell the gold." So, either the IMF is selling the gold in chunks [and not the whole amount to anybody], perhaps offering it to a few central banks. Hence, the Reserve Bank of India is waiting to see it the offers to others are taken up. If they are not then it will pick up the refused amount. Perhaps they will take the entire 403.3 tons.
- If the amounts are refused by other central banks, it seems unlikely that the public will hear of these refusals. So we expect either another announcement saying India has bought the balance of 203.3 tons, in addition to the first tranche of 200 tons, or that another central bank [China, Russia?] has bought the balance.
- Any concurrent/consequential sales being made by the IMF are likely to be announced very soon.
- There seems little point to a sale being made anonymously now that the India purchase has been announced, the cat is out of the bag. Add to that the fact that central banks are buying gold has already turned the market tide that for more than 25 years has expected central banks to be sellers. Officially, publicly, they are buyers now.
- Most people expected China or Russia to be the buyers, because they have been buying gold in the open market for years now. The announcement that India has bought so much and is prepared to buy more now enlarges the list of central bank buyers. This action speaks far louder than words. Since then Sri Lanka has said it is buying gold for its reserves [although only a guessed amount of 5.3 tons. Who next?
- Gold has a firm place in the monetary system,[as a reserve asset, not a means of exchange] in the face of an unstable monetary system, that is still decaying. This purchase expresses that sentiment, at central bank level.
- The shape of market demand will and is already broadening to include major institutions. Their appetite has a huge capacity, so traditional gold demand may well be pushed to one side as they buy what they want. This will be at current or higher and possibly much higher prices.
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