LONDON (Commodity Online): Gold price is on a heady forward move. Yellow metal passed through the psychological price level of $1000 per ounce two months back, and since then gold price has been moving up at a scorching pace. One main reason why gold price surged to nearly touch $1150 this week is the recent decision by India to buy 200 tonnes of gold from the International Monetary Fund (IMF).

Following the purchase of IMF gold from India--the world's largest importer and consumer of the yellow metal--several central banks across the globe are lapping up gold reserves. Central banks believe gold is the best bet as an economic reserve against the plunging US dollar.

But why did India rush to buy gold from IMF? In fact, the Reserve Bank of India (RBI) had no pressing reason to purchase gold from IMF so immediately. Following is an analysis on why the Indian central bank rushed to buy IMF gold, from BNP Paribas Fortis/Virtual Metals Group.

“The RBI had no pressing need for 200t of gold from the IMF - but the IMF has a pressing need to sell its 403.3t of gold to fund its activities. By coming to the assistance of the IMF in this way India achieves a couple of things. It ingratiates itself with the IMF, within whose powerful corridors this gesture will resonate in years to come. The purchase also means that the India/IMF gold pact is a useful signal to other central banks, who also might wish to make a nod of support in the direction of the IMF - it signals that- it’s all right, you can buy gold, no-one will think it absurd if you do it via the IMF.. And even after this 403.3t has been sold, the IMF will still possess 2,813.7t. Having sold some, it will be that much easier to sell more in the future, if the IMF management thought it sensible.

Could it be that India has bought gold now in order to encourage others? –or at least pave the way for similar deals in the future? Among the other central banks who might wish, one day, to please the IMF by taking off its hands (at market prices) some surplus-to-requirements gold the leading candidate is China, for obvious reasons, given its huge foreign exchange reserves and rising superpower status. So far China’s official sector purchases of gold have been limited to taking it from local mine production and scrap- a much cheaper method than buying either IMF or open market gold.

Interestingly enough, the IMF's managing director, Dominique Strauss-Kahn, was scheduled to visit Beijing on 16th-17th November .There’s little doubt that the IMF’s “spare” gold will be a topic under discussion. Strauss-Kahn’s trip may be no more than a warm-up preliminary meeting. He will have some persuading to do, if he wants the People’s Bank of China to take some IMF gold. The unofficial (but influential) view within Beijing’s establishment seems to be that buying at these kinds of prices makes little sense.

According to Wei Benhua, former deputy head of the Chinese state administration of foreign exchange (SAFE), in an interview by the Chinese business magazine Caijing: “At present we should not buy. Instead we should wait for the IMF to sell gold next time, when the price of gold drops to a relatively low level, say, about $800 per ounce.” Although China’s announced purchase in April this year wasn’t quite the shift into gold that gold bulls had been hoping for, the symbolism of China, India and Russia all adding to their gold reserves will inevitably be construed as implying that gold is not just an official asset of the past, but relevant today and possibly the future.

There’s no denying that some central banks are sounding keener than they were. Just two days after India’s announcement the Sri Lankan central bank governor made his comments relating to Sri Lanka3 accumulating gold in recent months. Yesterday, Mauritius announced it had purchased two tonnes of IMF gold. The amounts here are not large but it is the sentiment that matters. But, although the landscape has been modified, we do not see a return to the days when central banks maintained very large gold reserves, measured as a proportion of their overall foreign reserves. Overall the sector currently has 30,000t – so, even a large purchase such as the RBI’s is a drop in the bucket.

One day Indian voters might look back and criticise the RBI for having bought its 200t at the top of the market; but for now, its action will surely discourage those central banks who were thinking of selling. The only negative from the official sector at the moment is simply that things can’t get much better. For now the implication is that central banks, which have supplied an average of 311t/year to the market since 1994, will be a neutral influence in supply/demand terms.

In the short-term, with European banks seemingly content to hold back from sales, central banks might even be net purchasers. The bottom line is that the gold price rally has got everything going for it right now - few official sector sellers, some official sector buyers, a low-interest rate environment, and a weak US currency. It’s a perfect storm. The only question really, is whether this storm will have blown itself out by this time next year.”