Is India Leasing its IMF Gold Purchase?!

By Michael J. Kosares at USA Gold

What puzzles me about the Reuters report (IMF gold sale may lure Asian central banks, immediately below) and Mr. Nitsure’s logic is why these same Asian central banks didn’t buy previously? What difference does it make now that the IMF is going to sell in smaller increments “on market?” What is the difference between “on-market” and “off-market” anyway? If a central bank awash in dollars wants to buy official sector gold, why demarcate between on and off-market?

Watching all this happen raises an old concern of mine, i.e. that most of these sales are directed for purposes we do not completely understand. Was China, for example, locked out of bidding on the IMF gold because it could not be relied upon to lease the metal back to the market? It seems odd to me that we haven’t seen an announcement of a purchase from the IMF by China, for example, when we know that both its sovereign fund and central bank have announced an interest in buying and could lay out the cash for a tranche this size without even blinking.

I recall that after India’s purchase from the IMF on 11/3/09 the price rose on a wave of euphoria that peaked in early December. From there, the price dropped into the $1050s by February. This is the sort of market action those of us who attended this market in the 1990s and early 2000s might recognize as a familiar pattern. Did the Reserve Bank of India take-in the IMF gold and then lease it back out? Is that why the price dropped? Has China been rebuffed in an effort to buy the IMF gold and India favored because it is a “player?”

In considering these possibilities, I recalled coming across a speech while researching another topic by Dr. Y.V. Reddy Governor, Reserve Bank of India on Gold Banking in India, delivered some years ago to a meeting in India sponsored by the World Gold Council. I revisited that speech this morning because there is something about the IMF sales and what is going on at present that doesn’t add up. Perhaps the Reserve Bank of India isn’t as pro-gold as we might have hoped, or, at the least, its seemingly public pro-gold stance might have some soft spots in it from the gold owner’s perspective.

Here is what Dr. Reddy said in that speech:

“What should be the possible objectives of NGP (India’s New Gold Policy)? The review of our policy so far and the rationale for NGP that we considered indicate clearly the desirable objec tives of NGP. The major objectives should perhaps be to:
a. recognise the importance of gold in the Indian economic system and enable gold to play a transparent and positive role in the industrial development, employment and export sectors of the economy,
b. ensure orderly development of gold related industry in India in terms of physical standards and consumer protection,
c. create and nurture appropriate official regulatory framework and self-regulatory trade bodies,
d. exploit the scope for generating revenues to the central, state and local governments,
e. align the regulatory framework and institutional capabilities in the financial sector – especially banking sector – to enable the above, including gold banking, and
f. enable fuller integration of gold with other areas of domestic economy and closer integration with world gold economy, consistent with our economic reform policies.”

Later in the same speech in ticking off his “To-Do” list, Dr. Reddy said:

“Eighth: how should the banks equip themselves to do gold banking – immediately with the present legal and policy frame – and soon to exploit the opportunities under a possible NGP?

Ninth: and this is critical from the RBI’s point of view – what is expected of the RBI in the context of developing gold banking now, and under a possible NGP?”

(Link: Address by Dr. Y.V. Reddy Governor, Reserve Bank of India on Gold Banking in India )

(My emphasis. To the best of my knowledge this speech was delivered at a World Gold Council meeting in 1996, the copy I have seen -linked above – is not clearly dated. However, lest you begin to think that these ideas are dated, in 2006 Dr. Reddy delivered another speech to the International Monetary Fund in which he said “Perhaps, it is possible to illustrate, with a bit of lack of modesty, how this has been done, with a quote from Mr. S. S. Tarapore, my predecessor as Deputy Governor: ‘While I have been assigned the task of talking about gold and capital account convertibility, before doing so I would, for a moment, like to refer to some developments prior to the setting up of the committee on Capital Account Convertibility (CAC). When the definitive history of India’s policy on gold is written up, the speech by Dr. Y. V. Reddy, Deputy Governor, Reserve bank of India, at the World Gold Council Conference on 28 November 1996 will stand out as a watershed as it is perhaps the only speech by a senior Indian official which squarely takes on issues on gold policy and it will be appropriately recorded as a forerunner of major policy change. It is by raising pertinent issues that Dr. Reddy has paved the way for the committee to come up with specific recommendations on India’s policy on gold.’”

Link: Central Bank Communications : Some Random Thoughts by Dr. YV Reddy, Governor, Reserve Bank of India

As you might already know, this same Dr. Reddy was governor of the Bank of India from 2003 to 2008. He has been succeeded by a veteran of India’s finance ministry, Duvvuru Subbarrao. I was unable to pin down whether or not Mr. Subbarrao would follow in Dr. Reddy’s footsteps with respect to India’s gold policy, but clearly, it wouldn’t be out of the realm of possibility that the Reserve Bank of India would be a gold lessor given these pronouncements.

Please note, dear reader: I should emphasize that all the above is a speculation, and, a sketchy one at that. It could be that India has no interest whatsoever in leasing its gold. Likewise, China might very well have little or no interest in purchasing IMF gold. If the Reserve Bank of India wishes to lease, or in any way mobilize its gold, it is certainly within its rights and purview. At the same time, it would be interesting to know whether or not it is mobilizing its gold, if for no other reason, than to live up to the “transparent and positive role” for RBI outlined by Dr. Reddy in that same speech in 1996. Short of an admission (or denial) from the Reserve Bank of India, the reality on the RBI’s role in the gold market will be difficult to pin down.

What does all of this mean to the average gold investor?

Once again we are trying to ascertain what might be going on in what is still an opaque market despite the public pronouncements to the contrary by the official sector – Dr. Reddy’s included. It would be interesting to know whether or not India is leasing the gold it has purchased from the IMF, but in the end it doesn’t really matter. These considerations are academic as far as the market itself is concerned. They may interest people like me who follow the politics of gold, but in the end they will only have a passing effect on the market price itself.

In times like these when the rush to physical gold by the investors globally, including by some highly capitalized hedge fund managers like George Soros and John Paulson, is the dominant feature, physical demand is clearly a more powerful force than the meager tonnages the official sector is able to muster whether it be by sale, swap or lease. Just as the various machinations of the central banks did little more than apply a relatively ineffective harness to the gold price in the past, so would the machinations of the Indian central bank in the present (if it were in fact proven that it is indeed buying gold from the IMF and then leasing it). If, in fact, the gold price is temporarily driven down like it has been early in 2010, it should be viewed a buying opportunity just as the British sales at the turn of the millennium were taken by the astute investor as a buying opportunity. Somehow, though, I believe we are far beyond the kind of market we had back then. If India is leasing its IMF gold, the market will likely take it as a small matter and go about its business without so much as look over its shoulder.

Michael J. Kosares
Author: The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold
Founder: USAGOLD-Centennial Precious Metals