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Why should we care about the IMF selling a truckload of gold to India?

Well, to start, because the gold market clearly cares deeply.

Bullion surged more than $30 (U.S.) to $1,085 an ounce in New York Tuesday, trouncing is record high set just three weeks ago, after the IMF disclosed that it had sold 200 tonnes of gold to the Reserve Bank of India - for the low, low price of just $6.7-billion. The sales took place over the past two weeks, and represent almost half of the IMF's previously announced 403.3-tonne gold sales program.

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It's easy to see how this is good news for the IMF, which sold at the top of the market to raise much-needed funds to get its finances on a more solid footing, after financial-crisis-related bailouts had drained its coffers. India seems pretty happy, too, converting some of its ample foreign-currency reserves into a rock-solid asset and better diversifying its central-bank holdings.

But why should shuffling gold from, essentially, one central bank to another be such a big deal to the open market?

Precisely because this gold never hit that open market, and never will.

The prospect of the IMF and other gold-rich central banks selling off gold reserves to the open market was one of the few factors out there weighing gold prices down. Ever since the IMF decided to start selling gold, market watchers had been bracing for a possible flood of gold supply that would take the wind out of gold's sails.

The fact that the IMF sold fully half of its gold program to a single buyer, off-market, in one fell swoop just six weeks after approving the sales program, caught the gold market by surprise.

"I 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," Bank of Nova Scotia director of precious metals sales Simon Weeks told Reuters.

Now, suddenly, the market is considering the very real prospect that the rest of the IMF sales program could end up with central banks, and little, if any, will ever hit the streets.

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"We suspect it may be [bought by]China, other Asian countries, Russia or even India again, as they hold relatively little gold relative to their very large [foreign currency]reserves, and may want to diversify away from U.S. dollars," wrote Bart Melek, global commodity specialist at BMO Nesbitt Burns, in a research note.

China, in particular, is rumoured to be eager to snap up the rest of IMF's gold, as it looks to diversify its own massive foreign reserves - an uncomfortably large amount of which is tied to the sinking U.S. dollar.

This would keep a whole lot of gold out of the market, and that's what got traders excited Tuesday. Yet Mr. Melek points out that such an event would essentially be "somewhat neutral from a supply/demand perspective" - since the sales would also remove open-market demand for gold from the central banks that are able to buy from the IMF instead.

Still, the fact is that the RBI looked at $1,000-an-ounce gold and was still willing to buy an awful lot of gold at that elevated price. Aside from supply/demand balances, that told gold traders that some pretty big customers are still hungry for gold at current price levels, and that there are ready buyers to snap up central-bank supplies.

That might be enough to fuel another full-fledged bull run for gold, but it certainly removes some big questions that were overhanging the market.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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