No golden shift from dollar yet

The International Monetary Fund (IMF) on Monday announced the sale of 200 metric tonnes of gold for about $6.7 billion to the Reserve Bank of India (RBI). Given that this is the first time that the RBI has purchased gold since 1998, juxtaposed with the obviously struggling dollar, does this transaction signal a shift away from the American currency or is that over-stating matters?
Experts tell DNA’s Venkatesan Vembu that it is too early to say with certainty that India is diversifying away from the dollar but, yes, it is a good asset with which to neutralise the currency revaluation impact.

Is RBI’s gold purchase a sign that it is diversifying reserves away from a weakening US dollar?
It’s hard to say. The RBI hasn’t made its reserve management policy public. Standard Chartered economist Anubhuti Sahay points out that this is the first time since 1998 that the RBI has purchased gold. “Buying gold, which provides a hedge against dollar depreciation, may indicate that the RBI is trying to provide stability to its reserves,” says Sahay. But even after this 200 metric tonne purchase, the RBI’s gold holdings account for only 6% of reserves. “That’s a small proportion, so it cannot provide a lot of stability.” But if we see more such moves from the RBI, it could confirm that it is indeed diversifying away from the dollar.

What other motive might the Reserve Bank have?
Last year, India’s reserves fell by $58 billion, of which $37 billion was the result of currency movements, points out Sahay. Perhaps the RBI feels that gold, whose price has run up in recent months, is a good asset with which to neutralise the currency revaluation impact, given that the dollar is expected to remain weak. One other reason, she reasons, may be that the RBI is seeing a lot of foreign exchange inflows.

Is it wise to buy at such high prices? Does this now set a base price for gold?
When the IMF announced the planned sale of 403 metric tonnes of gold in September, the price was about $850 a troy ounce. The average price at which the RBI purchased, between October 19 and 30, was $1,045 an ounce. “There wasn’t a huge amount of time lag between announcement and transaction; these decisions cannot be made overnight,” says Sahay.
“I don’t think the RBI purchase sets a base price,” says Standard Chartered’s London-based Head of Commodity Research Helen Henton. “It hasn’t changed the volume of gold in the world at all; it’s just a shifting of stocks from one place to another.” The main driver of gold prices, she adds, has been the weakening US dollar, “and we will see more of that, so we see gold prices well supported. We think gold will remain pretty much over $1,000 on a sustained basis.”

Will the RBI’s gold purchase drive down the dollar’s value even more?
It may not have an impact. In the near term, in fact, the US dollar, which has rebounded somewhat in recent weeks, may rally further, says Singapore-based currency strategist Thomas Harr. “However, going into year-end, we see further downside for the US dollar given seasonal factors and the greenback’s expanded role as the world’s new funding currency.”

Will other central banks also start buying gold?
The IMF still has 203 tonnes of gold from its planned sale. “We could see more central banks coming up to buy gold,” reckons Sahay. “Else, it has be to be sold in the open market, which may not be good for prices.” London-based metal analyst Daniel Smith believes that central banks seem to be altering their perceptions of gold. “Their desire to sell gold has clearly diminished, and lower sales have helped tighten the market.”