The gold on offer will not hit the market all at once. "India can justly lay claim on the entire amount, as a member country that chose not to withdraw its zero-interest SDR deposits.
IMF's gold is once again slated to be up for sale. In July 2009, the US Congress approved sale of 403.3 tonnes of gold by the IMF, which represents one-eighth of the IMF's total gold holdings. The IMF sold 209 tonnes of gold in the month of October 2009 when India bought 200 tonnes. The remaining nine tonnes were sold to a few countries like Mexico and Sri Lanka. It has now been reported that the IMF proposes to sell the balance 191.3 tonnes of gold.MF's gold is once again slated to be up for sale. In July 2009, the US Congress approved sale of 403.3 tonnes of gold by the IMF, which represents one-eighth of the IMF's total gold holdings. The IMF sold 209 tonnes of gold in the month of October 2009 when India bought 200 tonnes. The remaining nine tonnes were sold to a few countries like Mexico and Sri Lanka. It has now been reported that the IMF proposes to sell the balance 191.3 tonnes of gold.
An IMF spokesman has stated that the institution would start selling the gold in the open market in a phased manner as recommended by the Andrew Crockett Committee. A committee of experts - which included the former US Federal Reserve, Mr Chief Alan Greenspan and was chaired by Mr Andrew Crockett, former director of Bank for International Settlements and now Chairman of JP Morgan Chase — had recommended that the IMF's gold sales should not add to the announced volume of sales from official sources.
Hence the IMF's gold sales should be coordinated with current and future Central Bank Gold Agreements (CBGA). Under the current CBGA, a group of European central banks has agreed to limit its gold sales to not more than 500 tonnes annually. If gold is sold in the market rather than to an official gold holder, the Crockett Committee has recommended that such sales should be phased over a period of time to avoid market disruptions.
The global market is agog with reports of an imminent Chinese central bank purchase of IMF gold. It is widely speculated that China will purchase the balance of 191.3 tonnes of gold from the IMF. This should not come as a surprise since China made frantic efforts to grab the entire quantity of 403.3 tonnes of gold from the IMF during September 2009.
During the last 10 years China has been on a buying spree of gold to augment its gold holdings in its total reserves. China currently holds 600 tonnes of gold, which represents 0.9 per cent of its reserves. Its holdings are lower than the Netherlands (621 tonnes) and Japan (765.20 tonnes). India's gold stocks, which were static at 357 tonnes for a long time, have recently gone up to 557 tonnes, after its purchase of 200 tonnes of gold from the IMF for $6.7 billion, or at $1,045 per ounce. With this purchase India has emerged as the tenth largest gold-holding country in the world.
As far as the sale of gold by the IMF is concerned, India has a better claim than any other member country of the IMF, not to speak of China. In the first place, India, unlike China, is a founder-member of the IMF and had paid 25 per cent of its subscription in gold while joining the membership of the IMF, when the International Monetary Fund was established in 1944.
After the Second Amendment to the Articles of the IMF in the wake of US withdrawing its commitment to exchange its dollars for gold at the fixed rate of $35 per ounce in August 1971, the reserve tranches of the member countries were converted into SDRs. The reserve tranche was not eligible for any remuneration (interest) on the analogy of gold not earning any interest.
While industrial countries like Canada and Australia had withdrawn their respective reserve tranches, India had kept its reserve tranche equivalent to around 700 million SDRs intact till early 1991 when the country faced a serious balance of payment crisis.
Having foregone its interest earnings for nearly 20 years, India should be given the first choice of buying the balance of 191.3 tonnes of gold. As open market sale of gold could cause disruptions in the gold market, it would be advisable for the IMF to sell the gold to an official holder like India.
In the event of India buying the balance 191.3 tonnes of gold from the IMF, it will take its total gold holdings to 748.3 tonnes, which place the country above both China and Netherlands and just below Japan (765.2 tonnes). Of late, there is a manifest tendency among central banks of many countries to hold a major portion of their reserves in gold. This is evident from the decision of the European Central Bank to downsize its annual gold sale to 155 tonnes during 2009 as against its practice of selling 400-500 tonnes of gold during the last 10 years. The US government holds 8,133 tonnes of gold, the Euro zone 10,800 tonnes and the IMF about 3,000 tonnes.
Central banks and governments are estimated to hold 20.5 per cent of the world's total gold holdings, at 29,364 tonnes. Asian countries hold only 2 per cent of their reserves in gold. Were the Asian central banks to increase their holdings by just one percentage point, they would need to buy about 1,000 tonnes of gold.
According to the World Gold Council, official sector activity will be a key factor to watch in the year 2010. It is estimated that 15,000 tonnes of gold are privately owned by Indian residents. At current valuation, this is estimated at $50 trillion.
If the residents could be given fiscal incentives like immunity from wealth and income taxation as a one-time settlement and be permitted to use their gold as collateral to avail bank loans, for bringing their private gold to the official holdings, it will go a long way in augmenting the percentage of gold holdings in the total reserves of the country.
(The author, a former staffer at the International Monetary Fund, is a Member of the TN State Planning Commission. The views are personal.)
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