India buys half of IMF`s gold for sale; who`s next?

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By Surojit Gupta and Lesley Wroughton, edited by Jonathan Leff

The International Monetary Fund has sold 200 tonnes of gold to the Reserve Bank of India for USD 6.8 billion, quietly executing half of a long-planned bullion sale that has threatened to slow gold's ascent.

The sale, which surprised traders who expected China to be the leading buyer, will relieve the gold market of some uncertainty over how and when the IMF would sell 403.3 tonnes of gold, about one-eighth of its total stock. The deal will increase India's gold holdings to the tenth largest among central banks.

It also fuelled speculation that other governments -- including Beijing -- may be ready to diversify their reserves even at near-record gold prices, helping soak up IMF supply that the fund may otherwise be forced to sell on the open market.

"Central banks in India and China will be happy to accumulate gold at these levels. I will not be surprised to see even some Southeast Asian banks buying gold," Aaron Smith, Asia head of the USD 1.65 billion technical trading fund Superfund, told Reuters.

For graphics on the world's top gold reserve holders: http://graphics.thomsonreuters.com/119/GLD_TP121109.gif

Spot gold prices rose about USD 4 to USD 1,063 an ounce on Tuesday, just shy of last month's USD 1,070.40 record high, aided primarily by a falling U.S. dollar. Traders said the IMF news could add to the market's upward momentum.

"The fact that they've sold the gold to India would suggest there's going to be fewer official sales by the IMF on the market. So that might be a positive theme for the gold price," said David Moore, commodities strategist at Commonwealth Bank of Australia.

Surprise Buyer

Although the IMF's plan to sell a share of its gold holdings in order to increase low-cost lending to poor countries had been flagged for a year before it was formally approved in September, both the speed of the deal and the buyer were a surprise.

Although India is the world's biggest consumer of gold, primarily in the form of jewellery and investment among its billion-plus people, its central bank had given few indications of being a front-runner in the move to diversify into bullion.

The proportion of gold as part of its total foreign reserves had fallen over the past decades, officials said.

India's foreign exchange reserves held at the central bank totalled USD 285.5 billion on Oct. 23, of which gold comprised just over USD 10 billion. The latest purchase will lift its share of gold holdings from near 4% to about 6%, much less than most of the developed world but four times China's share.

For a graphic on the share of gold in central bank reserves:

http://graphics.thomsonreuters.com/119/GLD_RSVS1109.gif

Former Reserve Bank of India Governor Bimal Jalan said the move was aimed at boosting resources for the IMF as both India and China had promised to help raise "fungible resources" to help other developing countries.

"This transaction is an important step toward achieving the objectives of the IMF's limited gold sales program, which are to help put the fund's finances on a sound long-term footing and enable us to step up much-needed concessional lending to the poorest countries," the IMF's managing director, Dominique Strauss-Kahn, said in a statement on Monday.

The Reserve Bank of India said the purchase was an official sector off-market transaction and was executed during Oct. 19-30 at market-based prices.

An IMF official said the sale was concluded at an average price of about USD 1,045 an ounce and that the transaction would be paid in hard currency and not in IMF Special Drawing Rights.

No Market Disruption

A senior IMF official, speaking on condition of anonymity, declined to say whether other central banks have expressed interest in buying the remaining gold for sale.

He said if no other central banks came forward, the IMF would proceed as planned to sell the gold in the market, but reiterated that the fund would publicize its intentions before doing so to avoid disrupting the market.

Still, the threat of further open-market sales remains a medium-term source of concern for gold traders, mindful of the five-year pact among European central banks to sell down a maximum 400 tonnes a year of their holdings, an agreement that was renewed in August and includes the IMF volume.

The market's focus has now shifted to China, which has reportedly been in talks with the IMF about buying some of the fund's bullion as Beijing seeks to shift some of its more than USD 2 trillion in foreign exchange reserves away from the U.S. dollar.

"Now people may think China will buy the other half," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong.

Already the world's top producer of gold and rivalling India as a consumer, China revealed this year that it had quietly lifted its own government holdings of gold stocks to 1,054 tonnes from 400 tonnes when it last reported its holdings in 2003.

It is the first time since 2000 that the IMF has sold gold to a central bank. Between December 1999 and April 2000 in separate transactions, the IMF sold a total of 12.9 million ounces of gold to member countries Brazil and Mexico.

(Additional reporting by Lewa Pardomuan and Sambit Mohanty)