IMF Sells Gold to India, First Sale in Nine Years

The Reserve Bank of India became the latest central bank to stock up on its gold holdings, purchasing 200 metric tons directly from the IMF over the last few weeks. The transaction, equivalent to 8 percent of global annual mine production, accounts for almost half the 403.3 tons that the IMF in September agreed to sell as part of a plan to shore up its finances and lend at reduced rates to low-income countries.

Despite the sizable purchase, India’s gold holdings ($10.3bn) represent less than 4% of its total foreign exchange reserves ($285.5 billion) as of October 23, 2009. This is well below the 30-40% more reflective of developed country central banks.

While the pending IMF sale created a pull back in the price of gold in September, India’s sizable purchase suggests significant appetite on the part of foreign central banks eager to diversify their exposure to US dollars.

Even with China’s purchase of 400 metric tons earlier this year, bringing its reported gold holdings to 1,045 tons, the country remains way underinvested in the yellow metal, with gold representing less than 2% of its foreign exchange reserves. I wouldn’t be surprised if they take down the remaining 200+ tons the IMF intends to sell later this year.