RBI buys half of IMF's gold for sale; who's next?

By Surojit Gupta and Lesley Wroughton

MUMBAI/WASHINGTON (Reuters) - The International Monetary Fund has sold 200 tonnes of gold to the Reserve Bank of India for $6.7 billion, quietly executing half of a long-planned bullion sale that has threatened to slow gold's ascent.

The deal, which surprised traders who expected China to be the most likely 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 $1.65 billion technical trading fund Superfund, told Reuters.

Spot gold prices earlier rose by nearly one percent, but later reversed those gains to trade little changed at around $1,058 an ounce on Tuesday, within striking distance of last month's $1,070.40 record despite a rallying dollar. Traders said the IMF news could add to the market's upward momentum.

"It's potentially bullish from several points of view," said Commerzbank analyst Eugen Weinberg. "Gold was kept off the market and sold directly to cental banks so potential sales on market are limited by this."

"Secondly, it showed large buyers are ready to accept the current price levels. Thirdly, the central banks are increasing their gold reserves. Last but not least the central bank gold agreement sales of 400 tonnes... is half empty already."

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 $1,045 an ounce and that the transaction would be paid in hard currency and not in IMF Special Drawing Rights.

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, the speed, scale and identity of the buyer were a surprise.

"It was always thought that some of it would be sold off market but it was a bit of a surprise that as much as 200 tonnes had been sold off market," said Simon Weeks, director of precious metal sales at Bank of Nova Scotia.

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 signs of seeking to diversify its reserves pool into bullion.

The proportion of gold as part of its total foreign reserves has fallen from over 20 percent in 1994 to just under 4 percent.

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

Indian Finance Minister Pranab Mukherjee backed the central bank's purchase. "And naturally as a finance minister, my advice to the governor of RBI (Reserve Bank of India) would be that if you are in a position keeping in view the availability of foreign exchange, you buy that (gold)," he told reporters.

"And from that perspective it has been bought. But don't put too much emphasis to this event."

The RBI does not officially talk about its diversification strategy. On Tuesday, the RBI said the purchase of IMF's gold was done as part of its foreign exchange reserve management.

But there may also be a geopolitical motive behind the deal: India, like China, is also seeking closer ties with the IMF to assert its authority on the global economic stage.

"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.

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 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 $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 600 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 in SINGAPORE and Jan Harvey in EDINBURGH; Editing by Jonathan Leff)