India has shown the way, and charted out a clear path for the road ahead with its US$ 6.7 billion gold purchase.

Buying 200 tonnes of gold from the International Monetary Fund, almost half of the 403 tonnes earmarked for sale by the IMF, India has effectively set a floor price for the desired metal.

In the process, the country may have displeased US president Barack Obama and his Treasury secretary Timothy Geithner, who could be figuratively scratching their heads in vain.

Didn't India get the memo?

Developing nations are supposed to keep their excess cash in Treasuries, not go around buying up metal. Especially one that doesn't pay any interest or dividend whatsoever, and can't be eaten by the country's poor.

So, why did India do it?

According to the Financial Times, the country's finance minister warned the economies of the US and Europe had collapsed.

India's central bank is the tenth largest gold holdings among central banks, with the new buy. But it probably isn't finished yet. Gold makes up just six per cent of India's foreign exchange reserves. There's plenty of room for that to grow.

So then, could it be the dollar?

Dollar woes?

The Indian Finance Minister rejected any suggestion that the country had lost confidence in the US currency. Most of India's $285 billion in reserves is held in US Treasury bills. He said that the gold operation was just a bit of foreign exchange asset management.

But there is clearly more to it than mere housekeeping: India bought gold, not euros or Swiss francs. China, Russia and even the Gulf petrostates have been grumbling about the falling dollar.

And what of the myriad discussions about the possibility of alternative reserve currencies to the greenback?

Remember, the deal has been brokered at a time when hedge funds are punting on the yellow metal in a huge speculative carry trade.

Using low US interest rates, they are betting on commodities priced in dollars, such as oil and copper as well as gold.

The assault on the dollar was a bit muted on Thursday:  Gold fell for the first time in four days in London as the dollar climbed, curbing demand for the metal as an alternative investment.

It's not just dollars that are in trouble - people are afraid of all paper currencies, said commodities trader Matt Zeman at LaSalle Futures Group.

There's been some profit-taking, and there's a rebound in the dollar, said Bernard Sin, head of currency and metals trading at bullion refiner MKS Finance SA in Geneva. I don't see a substantial rebound in the dollar. Gold will still have a chance to move higher.

See-saw ride

On Wednesday, gold saw slight losses in Asia and then rose almost 1 per cent to reach as high as $1095.25 by early trade in London.

The gold price then pulled back under $1090 around 08:00 EST and rose to a new all-time high of $1095.42 an ounce a little before noon.

Gold fell back off in the last couple of hours of trade, but ended with a new closing record, up 0.2 per cent.

The dollar gold price then shot to a new trading record of $1098 an ounce in after-hours access trade, shortly after the Federal Reserve said it will keep US rates at zero for an extended period.

The Fed said it would watch to see if economic growth can pick up. Many analysts predict zero interest rates until 2011, in line with a flat economy.

President Obama, meanwhile, told a White House economic panel: We are just not where we need to be yet. We've got a long way to go.

Significant sign

India's decision to switch 2.3 per cent of its US$ 286 billion foreign exchange reserves into gold - increasing gold's share of those reserves to 6 per cent - is definitely not an all-in wager. But it is significant.

The transaction has turned heads - not just in Washington, but even in Beijing.

China, the world's top producer and consumer of gold, has been widely assumed to be buying up domestic gold production, after revealing in April that it held 1,054 tonnes of gold, a jump of 76 per cent from its last word on the subject six years ago.

Surely, its colossal buying power - $2.27 trillion in foreign exchange reserves at the end of September - would nowhere be distracted with India's trifling $6.7 billion IMF purchase?

The fact of the matter is : a few top officials in Beijing are red-faced at India walking away with their prize How on Earth did India beat us to the punch? policy makers must be asking.

China has $2.3 trillion in foreign exchange reserves. But 70 per cent of those - or $1.6 trillion - are in US dollars. It owns over just 1,000 tonnes of gold. That makes up less than 2 per cent of China's reserves and makes China the seventh largest holder of above ground gold.

In fact the gold exchange traded fund (GLD) owns more gold than China. France, Italy, the IMF, Germany and the United States round out the top five (from fifth to first).

What this explains is that China could double (and then double again) its gold reserves and gold would still make up less than 10 per cent of its total forex reserves. Compare that to 66 per cent in Italy, 69 per cent in Germany, 70 per cent in France, and 77 per cent in the US, according to official numbers. So what's the big deal?

Moreover, China seemed the overwhelming favourite to get the first chunk of the gold the IMF was offloading to shore up its finances.

How then did India butt in?

Given that India's people are major gold hoarders, the country did display the savvy of a hedge fund with the IMF buy. It got what it wanted, surprised markets and is now content to sit back and reap the benefits as gold rallies.