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India Advised to Add to Official Gold Holdings

Central bank working paper recommends Buying Gold...

THE VALUE of India's official gold holdings has surged to an all-time high, writes MineWeb's Shivom Seth in Mumbai. 

The value of gold in the Indian government's kitty has grown by over $19,353 million (Rs 1,00,000 crore) in a short span of two years. The sharp rally in Gold Prices has helped bolster the overall value, as has the 200 tonne purchase by the Indian government from the International Monetary Fund (IMF) in November 2009.

India's central bank, the Reserve Bank of India, bought 200 tonnes of gold for $6.7 billion from the IMF. The central bank keeps the precious metal as part of its forex reserves on behalf of the Indian government. 

A working paper by the central bank had advised the Indian government to go in for more purchase of the precious metal. 

In 2010, while India held 558 tonnes of gold, the world had 30,463 tonnes of gold in official reserves. The gold holding of the Reserve Bank of India increased to 557.7 tonnes after accretion of 200 tonnes in 2009.

According to available data, the appreciation in the gold bought from the IMF itself is about $5,799 million (Rs 30,000 crore), as prices have nearly doubled from Rs 15,100 ($290.10) per ten gram level at the time of the purchase to nearly Rs 30,000 ($576) per ten gram level.

The value of gold held by the central bank, just before its 200 tonne purchase from IMF on November 3, 2009, stood at about $10.8 billion, as per the RBI data. 

Based on the current price of about $560.59 (Rs 29,000) per ten gram in the domestic market, the total value of the gold held by the RBI at present stands at about $30,920 million (Rs 1,60,000 crore).

While foreign reserves have increased substantially over the years, the physical stock of gold as part of official reserves has remained stable. RBI statistics show that the value of gold reserves remained unchanged at $30.92 billion.

Incidentally, the Indian currency has depreciated massively against the US Dollar. Last week, the rupee dropped to its lowest in 32 months, due to increased demand for the greenback from exporters, continued concerns over inflationary pressure and a slump in stock markets.

An RBI working paper released late last month said that the central bank should go in for more purchase of the precious metal.

"India's purchase of gold as a diversification strategy is fully justified and is in line with the global trend. There is scope to increase its holding,'' the working paper has said, while noting that the country's physical gold holding has remained static since the purchase from IMF in 2009.

The paper noted in India's case, while foreign reserves increased substantially over the years, the physical stock of gold as part of official reserves, remained stable. Eventually, gold's proportion in the total foreign reserves came down sharply. In fact, even with the last purchase of gold by the Reserve Bank, gold accounted for just around 7.9% of the forex reserves, the paper noted.

In the first half of 2011, the paper noted central banks were net buyers of over 155 tonnes of gold, almost double the 87 tonnes of net purchases in 2010. This signaled the end of an era in which the official sector had been a source of significant supply to the gold market.

To support its stand, the working paper showed how central banks in most of the emerging market economies and advanced economies had either bought fresh stock of gold or stopped selling their existing stock of gold in the wake of the recent global crisis.

The paper added that at this time, a number of investors including central banks seemed to augment their reserves of gold, perhaps affecting its price. 

India's purchase of gold apparently did not have any impact on the Gold Price trend and hence the stock of gold was in line with the global accumulation trend, the paper has said.

India's last purchase of 200 tonnes, apparently, did not cause any aberration on the international Gold Price trend, probably as gold was not bought from the open market, the RBI's working paper has added.

It has noted that it is difficult to address "the 'optimum level of gold' for India, though there is a strong economic rationale to hold sufficient quantity of gold as part of official reserves, especially during uncertain periods like global financial crisis.'' 

In its conclusion, the paper has emphasized that the recent global financial crisis only reiterated that gold, as part of foreign exchange reserves, continued to play a key role in the macroeconomic management devoid of its erstwhile purely monetary role. The Indian government is to look into the findings of the working paper.

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Founded in 1999 as part of the Johannesburg-listed MoneyWeb media group, Mineweb is one of the world's leading sources of mining and metals-investment news, comment and analysis. Managed since 2003 by professional mining engineer Lawrence Williams – formerly of Mining Journal, and with more than 30 years' technical and financial experience in the sector – MineWeb provides thorough, international coverage of the natural resources industry.

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