Gold Soars After India’s Buying Spree

Gold Soars After India’s Buying Spree: India’s purchase of 200 tonnes of gold from the International Monetary Fund sent the precious metal’s price to a record high yesterday, but fears that the move indicates lurking inflation or is a sign of further weakness in the United States dollar are misplaced, analysts say. Gold soared $30.90 U.S. an ounce to $1,084.90 U.S.

Gold Soars After India’s Buying Spree:India’s purchase of 200 tonnes of gold from the International Monetary Fund sent the precious metal’s price to a record high yesterday, but fears that the move indicates lurking inflation or is a sign of further weakness in the United States dollar are misplaced, analysts say.

Gold soared $30.90 U.S. an ounce to $1,084.90 U.S. on news of the $6.7-billion purchase by India’s central bank from the IMF, which had announced its intention to sell 403 tonnes of gold to help fund loans to developing nations.

As the financial crisis has unfolded, central banks have slowed gold sales and in some cases increased their holdings as countries like China, with large holdings of U.S. dollar assets, have fretted about the declining value of the greenback.

Investors have driven up the price of gold, which broke above $1,000 U.S. an ounce in early September, seeking a hedge against inflation they fear will be unleashed by the massive amounts of stimulus spending circulating through the system.

But India’s move – the largest central-bank purchase in at least 30 years, according to Bloomberg news reports – should be seen as nothing more than a central bank deciding to diversify its asset base, said Bart Melek, global commodity strategist with BMO Capital Markets.

“They certainly have worries about the U.S. dollar longer-term and, as a matter of policy, want to diversify.”

He added, however: “I’m not sure the average person can assume anything about a central bank’s action to forecast what’s going to happen with inflation or the U.S. dollar.”

John Nadler, senior analyst for Kitco Metals, a precious metals retailer, said: “The perma bulls would interpret this to mean central banks are confirming gold is the ultimate money. But India’s purchase is just a normal part of currency management practices.”

Nadler said gold’s run above $1,000 U.S. and the U.S. dollar’s 14-per-cent slide since early March are nothing more than a bubble driven by hedge funds.

Much as they did using the so-called yen carry trade before the financial crisis began, funds have been borrowing U.S. dollars at near-zero interest costs to purchase higher-risk assets like stocks and commodities.

“As soon as the U.S. Federal Reserve reverses or even show signs of reversing interest rates, this carry trade party is over,” Nadler said.

Once rate hikes begin, they will come quickly, knocking the value out of commodities like oil and gold that have been driven far beyond fundamentals by hedge funds, Nadler warns.

To buy gold now is likely to buy at the peak, he cautioned investors.

But Jamie Horvat, senior portfolio manager for Sprott Gold and Precious Minerals Fund, says gold’s price action yesterday is a sign of rising concern about the impact of mushrooming money supply.

Governments continue to pump money into the system to try to avert recessionary outcomes. The process drives down the purchasing power of money and “destroys the wealth of savers in the process,” Horvat said.

“That’s what we’re seeing today. That’s why oil is at $80 a barrel and copper is at $3 a pound. They continue to go up because the value of currencies continues to go down.”

Using what he described as conservative estimates, Horvat said gold is likely to hit $2,000 an ounce within three years. Melek’s target is for $1,100 U.S. an ounce by 2011.