India Buys IMF Gold

Gold smashed yet another nominal price record in early November, as the Reserve Bank of India emerged as the surprise buyer of 200 tonnes of gold worth US$6.7 billion from the International Monetary Fund. The 200-tonne figure translates to 6.43 million oz. gold, or about 8% of annual global mine production, and represents half of the 403.3-tonne amount the IMF signalled early in 2009 that it planned to sell.

The IMF’s gold hoard stood at 3,217 tonnes at the end of 2007, which ranked it third in the world behind the U. S. (8,314 tonnes) and Germany (3,417 tonnes), and ahead of France (2,603 tonnes) and Italy (2,452 tonnes).

Many gold watchers had expected China’s reserve bank to buy the first 200 tonnes, as that country’s foreign-exchange reserves are overweight in depreciating U. S. dollars and underweight in gold compared to most other countries. So India’s IMF gold purchase electrified the spot gold market on Nov. 3, driving prices up almost US$25 to a record US$1,089.10 per oz. before closing the day at US$1,084.30. This broke last month’s all-time record nominal high of US$1,070.40 per oz.

The IMF said the 200 tonnes was sold at an average US$1,045 per oz., and paid for with cash and not IMF special drawing rights. The process involved daily sales that were phased over the Oct. 19-30 period, with each daily sale conducted at a price based on that day’s market prices. The IMF has repeatedly emphasized that it wants to carry out its sales without disrupting the gold market, modelling its efforts on the Central Bank Gold Agreements.

The IMF will use gold-sales profits to create an endowment that is a central component of a new income model that the IMF’s board endorsed in April 2008. The IMF’s managing director, Dominique Strauss-Kahn, stated that the latest transaction is an “important step toward achieving the objectives of the IMF’s limited gold-sales program, which are to help put the Fund’s finances on a sound long-term footing and enable us to step up much-needed concessional lending to the poorest countries.”

For its part, with the 200-tonne gold purchase, the Reserve Bank of India will be lifting the gold holdings in its forex reserves from near 4% to about 6%. The reserve bank gave only a short, prosaic public statement that its purchase “was done as part of (its) foreign-exchange reserves management operations.”

On Oct. 23, India’s forex reserves amounted to US$285.5 billion, with gold making up US$10 billion of that. While that’s not much gold for a major country, it’s still about four times China’s official gold holdings.

• Like a recent heart-attack survivor, the management of Teck Resources must be feeling like the sky is a little bluer and the birds are singing a bit louder these days. Going by its latest quarterlies, Teck looks to have definitively turned the corner away from its severe debt problems that started more than a year ago and might have ended in the break-up of the company if its lenders had wanted to push things to their limits.

In its latest third quarter, Teck tallied net earnings of $609 million on record revenue of $2.1 billion, compared with net earnings of $424 million on revenues of $1.7 billion during the year-ago period. The company’s best performing assets in the latest quarter were in its core copper, coal and zinc businesses.

Of note, the company is now sitting on $1.5 billion in cash, and the spectacularly ill-timed US$9.8 billion in debt Teck took on in mid- 2008 to buy Fording Canadian Coal Trust’s assets has been whittled down to US$2.7 billion. The reduction came largely from a series of asset sales and a US$1.5-billion investment from China Investment Corp., the US$200-billion sovereign wealth fund.

Teck says its net debt to net-debt-plus-equity ratio stood at 34% at the end of the third quarter, compared with 52% at the end of 2008, when the company was under financial distress.

• In a move with long-term implications for New Brunswick’s power-hungry miners, the provincial government took the unprecedented step of striking a deal to sell most of the assets of its electrical utility NB Power to Quebec government-owned Hydro- Quebec.

It looks like one of the most boneheaded political moves we’ve seen in Canada in many years, but the New Brunswick government would get $4.8 billion in return, which would immediately erase NB Power’s debt. Under the deal, New Brunswick’s large industrial customers would see their electricity rates reduced to the prices paid by Quebec’s largest users.