Gold rallied to a record high Tuesday as IMF's gold sale to India boosted market sentiment. The benchmark contract for the yellow metal surged to 1088.5 before settling slightly lower at 1084.9. The contract gained +2.9% for the day. Weakness in stock markets amid credit concerns and decline in USD ahead of the 2-day FOMC meeting were also reasons driving gold higher yesterday. Today in Asia, gold price retreats to 1081 on profit-taking.

On Monday, IMF announced the sales of 200 metric tons of gold to the Reserve Bank of India (RBI). The amount represented about 50% o the total sales volume of 403.3 metric tons that was approved by the Executive Board in September. Interestingly, disposal of gold did not lead to market selloff. Rather, it increased the precious metal's appeal. There are several reasons explaining the situation.

The easiest and the most rational explanation is diversification from USD. After the US government has implemented massive fiscal stimulus to boost economic growth, the country is now facing the challenge of dealing with its budget deficit. Moreover, the Fed is committed to keep interest rates low at 0-0.25% for an extended period of time. This inevitably foreshadows a weak dollar outlook in the future.

Investors are happy because the amount was not sold in the market but to an official buyer. The purchase by the central bank of India indicated gold's status as an official reserve. As of October 23, foreign exchange reserves in India were $285.5B and the share of gold holding was only 3.5% ($10B). The Reserve Bank of India probably wants to increase its gold holdings.

Other developing economies also have similar agendas. China and Russia are the world's largest central bank holders of gold in the developing world. However, their holdings of gold remain below 10% of total reserves. We believe they are potential candidates for the rest of IMF's gold.

In previous G-20 conferences, developing countries have been aggressively trying to gain greater influence in the global economic arena. Some said that RBI made such purchase was to get a bigger voting share in the IMF. This is not impossible and if this is the case, China and some other parts in Asia might take similar actions in coming future.

Crude oil initially plummeted to as low as 76.55 as equities in Asia and Europe tumbled. Price rebounded in NY session after strong US factory orders which rose +0.9% mom in September after a -0.8% decline last month.

American Petroleum Institute reported sharp decline in crude oil inventory. In the week ended October 30, crude stockpile drew -3.38 mmb to 336.2 mmb as driven by decline in imports. However, both gasoline and distillate stockpiles rose as demand fell.

The US Energy Department is expected to report +1.5 mmb increase in crude inventory. For oil products, gasoline stockpile probably rose +0.83 mmb while distillate drew -0.6 mmb.

US Oil Inventory

Weekly change in inventory as of 30/10/09 ChangeMarket Expectation Previous
Crude oil  +1.50 mmb+0.78 mmb
Gasoline  +0.83 mmb+1.62 mmb
Distillate  -0.60 mmb-2.13 mmb