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Gold Jumps on India's 200-tonne IMF Purchase; LBMA Sees "Sea Change" In Gold Market

Gold Prices rose sharply to 7-session highs against the Dollar and new 8-month highs vs. the Euro early Tuesday after the Reserve Bank of India said it bought 200 tonnes of gold from the International Monetary Fund late last month.

Slated to sell 403 tonnes of gold in total, the IMF raised $6.7 billion from India's purchase, helping "put the fund's finances on a sound long-term footing," according to managing director Dominique Strauss-Kahn today.

India's purchase – which takes its total gold hoard to 557 tonnes, the 10th largest central-bank holdings – was done at an average price near $1045 per ounce during the second half of October.

The Gold Price in Dollars today rose above $1065 before easing back in early London dealing.

Versus the Euro – the world's most heavily issued currency – gold hit its best level since 15 March at €722.

Gold priced in Indian Rupees rose to new record highs near 16,500 per 10 grams.

"I think it was very significant that Paul Mercier, a senior central banker [from the European Central Bank] said official holders overall will no longer be net sellers of gold," said UBS analyst John Reade today, summing up the London Bullion Market Association's 2009 conference here in Edinburgh.

"Given the Indian announcement overnight, that forecast's already true for this year. Central banks are now net buyers."

ECB markets manager, Mercier yesterday told the LBMA conference that although diminished from its early 20th-century role in the world's monetary system, gold continues to be an important asset in global reserves.

In private investor and institutional portfolios, "We've seen a move away from unallocated gold to allocated gold," said Neil Clift of J.P.Morgan Chase at a debate held at the LBMA's conference this morning.
 
Commenting on the shift from unsecured credit accounts to physical positions held in secure custody, "[It means] the client owns their gold, there's no first lien over it, and they can come and take it away when they want."

"There will be a threat to the London market from overseas storage if we see the ETFs continue to grow, as we expect they will," Clift said, noting that Asian and Middle Eastern investors increasingly want exchange-traded products that vault in or near their home state – and are also priced in their domestic currency, rather than US Dollars.

On the supply side, and amidst what several speakers called "a sea change" in investment attitudes following huge accumulations of metal in secure LBMA-approved storage, "Sovereign wealth funds, hedge funds, and the ETFs are effectively surrogate mines, to my mind, holding a huge proportion of the above-ground supply," Clift went on.

"These guys are looking for strong investment yields...and I think we should expect to see the return of gold hedging as [large investors] seek excess returns", rather than the 1990s practice of Gold Mining companies selling forward their future production.

"Clients tell us they get better options liquidity from the ETFs rather than the established London market, which has been offering options for 15 to 20 years," said Raymond Key, managing director at Deutsche Bank in London, during the same session.

Commenting on the much-discussed issue of bringing the different bodies representing London's bullion market together into some more formal organization – and which is likely to see "cleared forwards" for London gold offered by a formal exchange very shortly – "I think it's fantastic for the bullion market that the [Chicago Mercantile Exchange] is now accepting gold as collateral on other positions," said Key.

"We can expect to see other exchanges accepting gold as collateral over the next year, alongside dollars, currency, T-bonds."

"Should we have cleared forwards? Absolutely," said Phil Clewes Garner of HSBC and chairman of the London Platinum & Palladium Market (LPPM). "It will add depth to the market, there will be more gold cleared in London and more gold in the vaults.

"But will it necessarily be through the CME? I think the regulatory environment in the United States will cause concern for many people in Europe."

In a straw poll of delegates held by John Reade at the conference's closing session, the average Gold Price forecast for Nov. 2010 was $1181 an ounce.

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Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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