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Commentary

RBI Buys 200 Tons Of Gold From The IMF

The Reserve Bank of India has bought 200 tons of gold from the IMF. The deal was done around $1045 per ounce, which means they’ll pay a little less than $7 billion for it. The IMF had announced that it would sell around 400 tons of gold – that’s 400,000 kgs of the yellow metal – and India’s managed to get half in.

Now the RBI is paying hard cash for the gold, meaning they won’t pay using IMF Special Drawing Rights or any such. There’s speculation that the RBI sold US T-Bills to pay for it. Which causes people to think the US will get all jittery because oh my god, people are running away from the dollar!

That is just silly.

India has 280 billion dollars of reserves. This $7 billion deal is like a drop in the ocean. There are not that many 200 ton deals to go around, and we can’t diversify enough using gold, and if we tried too hard every country will do it and drive the price of gold to crazy levels.

Which is good for my son’s education fund. But I digress.

Gold is around 6% of our total forex reserves – less than $15 billion. That the RBI is buying is interesting but only on influencing sentiment. There is simply no way to diversify the $280 billion easily. China’s got about 3 times our Gold reserves, and has been stockpiling commodities for a long time. Still, that doesn’t make a dent on their dollar dependance.

So it might be just posturing. With the US Fed saying things like “Exceptionally low rates for extended periods of time”, there is probably a fear that the dollar will be toilet paper except toilet paper is cleaner. This could be a signal that more of such measures will be taken. But the US will be hardly bothered about a piddly 7 billion – in fact they’ll probably not be bothered until it’s too late. In the interim, it’s better to do larger diversifications (set up infra funds using the reserves, buy different currencies, lend money to companies here and buy lots of companies abroad).

Gold, though, is an interesting interim play. I’ll stay long on it for a bit.

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