Posted by Joseph Y. Calhoun, III

The Reserve Bank of India bought a large allocation of gold from the IMF:

Nov. 3 (Bloomberg) — Gold jumped to a record after India’s central bank bought 200 metric tons of the metal from the International Monetary Fund, heightening speculation that there may be more official purchases.

Gold futures for December delivery rose to a record $1,087 an ounce on the New York Mercantile Exchange’s Comex unit and traded at $1,084.20 at 1:28 p.m., up $30.20, or 2.9 percent. A close at that price would be the biggest gain for a most-active contract since March 19.

“This will encourage other countries and other investors, especially Indians, who are big buyers anyway, to jump into the market,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois.

The Reserve Bank of India paid $6.7 billion for the bullion, which it bought from Oct. 19 to Oct. 30. It was “the biggest single central-bank purchase that we know about for at least 30 years in such a short period,” said Timothy Green, the author of “The Ages of Gold.” “The only comparable event was the U.S.’s steady purchases in the 1930s and 1940s.”

Prices also rose to an all-time high in gold traded in Indian rupees. Central banks, the biggest holders of gold, may diversify out of the dollar and buy bullion as ballooning U.S. debt and low interest rates weaken the currency.

“It is but a matter of time until China and the IMF announce much of the same,” said Dennis Gartman, an economist and the editor of the Gartman Letter in Suffolk, Virginia.

The most interesting aspect of the rally in gold today is that it comes even as the dollar is rising. Usually the relationship is inverse; gold rises when the dollar falls and vice versa. If gold is rising even as the dollar also rises, we have entered a new phase of the bull market in gold.

The G-7 central banks have been net sellers of gold for decades and the central banks of the emerging market economies that comprise the G-20 haven’t had the means to buy. That is now changing as China, Brazil and now India look to be buyers of gold to protect themselves against a devaluing dollar. This purchase by India was a bit of a surprise; the IMF had announced the sale of 400 tons over the summer but most were looking to China to be the major buyer. That India bought half of it in this transaction is surprising to say the least.

India now has about 6% of its reserves in gold but in the early 90s they held as much as 20% of reserves in gold. They haven’t sold any but the build up of reserves over the last decade had pushed the gold portion down to 4% of reserves. Will they go back to 20%? China has only about 2% of their reserves in gold, but has a larger position in nominal terms. China holds approximately 1050 tons versus India’s 550 tons. Maybe gold isn’t such a relic after all.