RBI's decision to shore up its gold reserves needs to be seen in the context of other central banks across the globe increasing their gold reserves. Among them are the central banks of China, Russia and a few countries in the European Union.
In the last one year, China has increased its gold holdings, by weight, by 75.69%, Russia by 18.78%, the Philippines by 18.50% and Mexico by 108.91%.
Compared with this, India's central bank did not add anything to its gold reserves in the last one year, according to Bloomberg data. (via RBI to buy 200 tonnes of IMF gold - Home - livemint.com).
Two years ago …
its (gold) reserves by 454 tons to 1,054 tons through domestic purchases and refining scrap metal, Hu Xiaolian, head of the State Administration of Foreign Exchange, said in an interview with the Xinhua News Agency today. China, the world's biggest gold producer, has increased its holdings before, Hu said in the interview carried on the administration Web Site. They rose from 394 tons to 500 tons in 2001 and to 600 tons in 2003. The U.S. has the world's biggest gold holdings at 8,134 tons, followed by Germany with 3,413 tons, World Gold Council data show. France has 2,487 tons and Italy 2,452 tons, while the IMF has 3,217 tons, according to the council.
Another report, from Market Watch, a WSJ web publication added,
The increase makes China the world's fifth-largest holder of gold, just ahead of Switzerland, and among the six nations plus the International Monetary Fund that have reserves of more than 1,000 metric tons. Although Hu did not elaborate on where China had sourced the additional bullion, her comments were interpreted as meaning they came from domestic sources and may included refining of scrap metal. Traders also say the gold was accumulated systematically over a number of years. Last year China ranked as the world's largest gold producer with 12.2% of world output, equivalent to 288 metric tons. The U.S. ranked second with a 9.9% share, or 234 metric tons.
What are the future plans of the Chinese? A http://www.redorbit.com" href="http://www.redorbit.com/news/science/340944/china_faces_dilemma_on_expanding_its_gold_reserve/" target="_blank">report quotes an analyst
China should increase its gold reserve from 600 tons to about 2,500 tons in a short term and to 3,000 tons in a long term to cope with the versatile exchange rate risks, said Teng Tai, an economist of China Galaxy Securities Company.
Of course, this really does not mean much – except that it may keep gold prices on boil. Whether a currency is backed by a 5% or a 10% gold reserve may not mean much, in this era of rampant use of (not just by the US of A) "a technology, called a printing press" as an economic tool. For long term economic stability, gold needs to be in the hands of individuals – and not Governments.
Since China is a significant gold producer by itself, it may not get a shot at buying IMF gold. India which has negligible domestic gold production, would therefore have been given preference.
Of course, prefence mayave been given to RBI purchase given its 'resposible' and 'mature' behavioue during the current Great Recession.
What does RBI's gold purchase mean
RBI's gold purchase means two things.
The Indian Government which has had a rather low percentage of gold holdings as their currency reserves will now bolster these reserves. Even after this purchase, Indian official reserves will only be the tenth largest in the world in absolute terms.
The threat of open market sales by the IMF, speculated by many and discounted by 2ndlook, overhanging the bullion market, stands neutralized. This provide a kicker to the gold prices in the short term.
The ideal thing ...
Sell gold to individuals. Governments should not have such large holdings of gold. Gold in the hands of Governments is the prime cause of war. Gold holding should be widely dispersed, as widely as possible, amongst individuals – like the Indian gold possession model. No national government, in the new financial architecture should be allowed to have more than 250 tons of gold – to progressively reduce to 50 tons.