India and China want IMF to sell all of its gold

The IMF holds a staggering 3200 tonnes of gold in its reserves which is sitting idle while the world's poorest are facing the fallout of the global economic crisis and the IMF itself is facing a liquidity crunch.

A report in the Financial Chronicle says that draft papers have been exchanged between Delhi and Beijing proposing that the IMF sell off its huge gold reserve which is an idle asset with a book value of $9.3 billion. But which would fetch close to $100 billion at current prices. Both countries are proposing that this amount be used to improve IMF's liquidity as well as to help the world's poorest countries tackle poverty. An earlier announcement after the G20 summit in London, by IMF, to sell gold to raise $6 billion, caused gold prices to slump. Now this proposed sale is going to be 16 times bigger than the earlier proposal.

This might seem bearish for the price of gold in the short term, but it is being proposed that the sale be staggered over a two or three year period. And if this sale comes to pass, most of this gold will never enter the retail market. Central banks of China, Saudi Arabia, Russia and India will use their dollar reserves to buy it off and increase their gold reserves. This will be a wise step towards a future where the USD will be vacating its seat as the world's reserve currency. One or some or all of the above countries, with some sort of understanding amongst them, may provide an alternative with a partially gold backed currency.

This sale if approved by the member countries of the IMF will improve its short term liquidity and will remove the pressure on both China and India whose economies have grown substantially in the recent past, to finance it.