Alia McMullen, Financial Post
Gold soared to a record high Tuesday after India surprised the market with the biggest single purchase of the commodity by a central bank in the past 30 years — a signal governments around the world are becoming increasingly uncomfortable about the sliding value of the U.S. dollar.
“It’s certainly indicative that the monetary authorities in India are not overwhelmingly upbeat about the outlook for the U.S. dollar,” said Erik Nilsson, senior international economist at Scotia Capital. “Bear in mind too that we’re talking about a jurisdiction that has had a long standing love affair with gold.”
Mr. Nilsson said India had increased its gold reserves to hedge against its U.S.-dollar holdings, which total about US$268.4-billion.
He said the increasing demand for gold as a hedge against the greenback was helping to set the stage for an alternative reserve currency or asset to the U.S. dollar, a proposal that has been trumpeted by countries such as China, France, India and Russia. However, any such change would not come quickly, Mr. Nilsson said.
The cost of an ounce of gold rose US$30.90 Tuesday to hit a record US$1,084.90 after it was announced the Reserve Bank of India had purchased 200 tonnes of the precious metal from the International Monetary Fund.
The IMF said the purchases were made in installments between Oct. 19 and Oct. 30 for a total value of US$6.7-billion.
Timothy Green, author of The Ages of Gold, said it was “the biggest single central-bank purchase that we know about for at least 30 years.”
Indeed, the purchase amounts to almost half of the 403.3 tonnes that the IMF approved for sale in September to diversify its sources of funding. The IMF owns more than 3,000 tonnes of gold.
Bart Melek, global commodities analyst at BMO Capital Markets, said the Reserve Bank of India’s gold purchase pushed the country’s gold reserves up to 7.1% of its total reserve assets. He said other countries, including China and Russia, have also been buying more gold, a trend that would likely continue while the U.S. economy remained volatile. On average, countries hold about 12.6% of their reserves in gold, up from 9.9% a year ago. Some of this represents an increase in gold holdings, but another driver of the increased proportion is the rise in the value of gold.
The price of gold has surged 52% since bottoming on Nov. 12 last year.
“Historically, gold has been a hedge against instability, has been a hedge against inflation, has been known to behave counter cyclically to equity markets,” Mr. Melek said. “Gold has reasserted its historic role of being a hedge, basically insurance against bad stuff, against everything from geopolitical problems to inflation to dollar issues.”
He said in the bullish case, gold could continue to push higher to average US$1,300 on an annual basis by the end of 2010 or early 2011.
Brian Christie, analyst at Desjardins Securities, said central-bank demand would be an important driver of the gold price, with India’s purchase adding to the positive momentum for the commodity.
“China is rumoured to be interested in some or all of the remaining IMF bullion; however, it is likely very sensitive to price,” Mr. Christie said. “Since the transaction with India was done at fair market value, the Chinese could be waiting for a pullback in the gold spot before pursuing this purchase further.”
With holdings of US$2.3-trillion, China is the largest holder of U.S.-dollar reserves and has been actively looking to diversify its portfolio.