>Gold up on IMF sale to India; Asia Ctrl Bks diversify

Sydney - News of India's central bank buying nearly half of the 403.3 metric tons of gold earmarked by the International Monetary Fund for sale boosted spot gold in Asia, reminding investors that central bank diversification away from the dollar will continue to prompt demand for gold in the open market.

The off-market deal also reinforces the view that little or none of the IMF gold may eventually reach the open market, limiting any bearish impact such a big sale may have had otherwise.

At 0700 GMT, spot gold was trading around $1,062.50 a troy ounce, up $2.90 on the New York close, and moving closer to last month's record high of $1,070.50/oz.

The Reserve Bank of India, or RBI, bought 200 tons of gold over a two-week period between Oct.19 and Oct.30, an IMF statement said Tuesday. Proceeds from the sale - $6.7 billion - indicate an average estimated price of $1,045 a troy ounce, far higher than IMF's projection of $850/oz a few months ago, when its executive board approved the sale.

IMF declined to comment on potential buyers for the remaining amount, but said it is still in "an initial period to sell gold directly to central banks and other official holders that may be interested in such sales."

"It makes sense to buy gold as it will appreciate more than the U.S. dollar," said a senior official at India's finance ministry. The move was to diversify reserves held by the central bank and RBI may buy more gold from the IMF, said the official who declined to be named.

There has been speculation that Chinese and Russian central banks may also be interested in buying gold directly from the Fund.

Open market sales will be conducted only if any gold is left after the "initial period" and "the Fund will inform markets before any on-market sales commence," the statement said.

Sue Trinh, currency strategist at RBC Capital in Sydney said the announcement supported the view that central banks are actively looking for ways to diversify their reserves away from the dollar.

Based on September quarterly data from the World Gold Council, the RBI held 357.7 tons of gold and with the current purchase taking the total to at least 557.7 tons, RBI has become the 11th largest gold holder among central banks, placing it after Russia, but before the European Central Bank.

The euro nudged higher against the dollar following the news, to rise through $1.4800 to an intra-day high of $1.4811 in a thinly traded market with Japan closed for a public holiday.

Broadening Demand Base As Central Banks, ETFs Buy Gold

"Central banks have switched from net sellers to net buyers. Over the last few years, gold ETFs (exchange traded funds) have become a major presence in the market. Gold's investor base is broadening, which is positive for gold price," said Janet Kong, managing director at Goldman Sachs' global investment research commodities division in Hong Kong.

Gold holdings in the SPDR Gold Trust, the world's largest gold ETF, have now reached 1,103.52 tons, making SPDR the 7th-largest gold holder, placing it ahead of Switzerland.

Kong said this growing interest in gold had fostered a gradual price rise in a market that is seeing increasing liquidity.

"Diversification has been an ongoing story for Asian central banks, and gold is one of the possible diversifiers. Gold holdings in comparison to dollar holdings are low," said Westpac Senior Commodity Analyst Justin Smirk.

While gold as a diversifier has limited potential since mine supply is capped, gold, unlike industrial metals, "never disappears, so there's potential for enough supply to build up for central banks to hold 1%-5% of their reserves in gold," said Kong.

RBI's gold holdings worth $10.32 billion, was only 3.6% of the country's total forex reserves of $285.52 billion at the end of last week.

"But it's not possible for (central banks) to change rapidly out of the dollar. This story is one of evolution, not revolution," said Smirk.

However, with the general view on the dollar rapidly changing, even European central banks that were net sellers in recent years could change their strategy going forward.

Speaking at the annual London Bullion Market Association Monday, European Central Bank's Deputy General Director for market operations, Paul Mercier said gold would remain an important asset for European central banks as risk diversification becomes a more significant issue.

In 1999, 15 European central banks agreed to limit gold sales to 2,000 tons, spread out over a five-year period. The signatories have twice renewed the Central Bank Gold Agreement, expanding the total quota for the 2004 agreement to 2,500 tons, but reducing it again to 2,000 tons this year after lower-than-expected sales in the previous sale periods.

Source: COMMODITIESCONTROL