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The Overnight Report: India Goes For Gold

 By Greg Peel

The Dow fell 17 points or 0.2% while the S&P gained 0.2% to 1045 and the Nasdaq picked up 0.4%.

Earlier this year the International Monetary Fund was given the nod from the US Treasury to sell some of its gold reserves in order to cover the cost and potential cost of supporting distressed economies across the globe. It has thus been known for months that the IMF had 403t to sell, but given the sale could only be completed inside the guidelines of the Washington Agreement the gold market was not immediately nervous. The Agreement involves a 500t limit on gold sales from European central banks in each of five years. In other words, it could take five years for the IMF to sell its gold.

However, hints were dropped by Chinese officials that the Chinese central bank may be happy to take the whole 403t, lock-stock. China's foreign reserves include only around 1% gold and about 70% US dollar assets - a ratio that China has been keen to rebalance. The Chinese central bank quietly bought around 400t from domestic sources over the last couple of years without the global market even realising, but its demand remains.

It was also known that Russia, in particular, was looking to take its gold reserves from 2% to 10%, and central banks in other emerging market economies have now long been indicating their desire to diversify away from US dollar assets and into alternative currencies and gold. But while all was talk to date, India acted.

It was revealed last night that the Indian central bank had agreed to buy 200t of gold directly from the IMF for what was basically a market price of US$1045/oz. This news sent the spot gold price soaring, jumping US$28.10 last night or 2.7% to a new all-time nominal high of US$1084.70/oz. Silver joined in the enthusiasm, jumping US87c or 5.3% to US$17.25/oz. China, where are you?

India's gold deal was the highlight in a choppy day's trade. An overall mood of weakness has descended on Wall Street but glimmers of positive sentiment are emerging to blur the picture.

Last night Warren Buffet's Berkshire Hathaway investment fund offered US$100 share for the Burlington Northern Santa Fe Railroad, valuing the company at US$34bn, sending its shares up 21%, and dragging all railroad stocks along with it. Similarly, toolmaker Stanley Works agreed to buy Black & Decker for US$3.5bn, sending its shares up 25%.

On the economic data front, September US factory orders rose 0.9% following a 0.8% drop in August and against expectations of a 0.6% rise. August was a blip in six months of positive trend, but in 2009 to date factory orders remain 13.9% lower.

The news was enough to spur on oil, which rose US93c to US$79.06/bbl.

It was an unusual session given the US dollar index, while choppy, closed slightly higher on the day at 76.38 and yet gold and oil rallied. Stocks and the US dollar bounced around on various bits of information. The irony in all of this is still related to leadership. Ask any stock trader right now what is driving the US stock market (and subsequently global stock markets) and the answer will be "the dollar".  Yet analysts at Action Economics in the US, for example, told Dow Jones last night "The dollar's roller-coaster ride continues as the unit remains largely tied to the equity market."

Talk about a dog chasing its tail.

A stronger dollar and stronger factory orders in the US were somewhat confusing for London, and base metal prices remained largely unmoved for the second day running.

Takeovers and the gold price had transport, material and gold stocks rallying last night on Wall Street, while it was not a great day for financials, thus helping to fuel the choppiness.

The world's biggest financier - UBS - last night announced a bigger than expected third quarter loss. Moving from Zurich and back to London, the Royal Bank of Scotland agreed it needed another round of bail-out funds from the UK government and took the 31 billion pounds on offer. Lloyds Bank, on the other hand, declined the funds and instead announced a 21 billion pound capital raising. Lloyds shares finished higher despite the implicit dilution, but RBS shares were trashed by 10%.

The banking news from across the pond had Wall Street contemplating whether its assumption that the GFC was now fully consigned to history might be a bit premature.

And back in Washington, it is believed Congress is about to sign off on an extension to the first homeowners tax credit from the planned November expiry out to April next year. Furthermore, it is believed another package for buyers of existing homes is to be added, and even furthermore, there is serious talk of another cash hand-out before Christmas.

Just as well the US government is flush with surplus funds isn't it? Oh wait...

Despite a rate rise, the Aussie is down slightly in 24 hours at US$0.9027. The 25bps jump was well priced in.

The SPI Overnight rose 12 points or 0.3%.

Tonight in the US all eyes will be on the Fed as it releases its monetary policy statement at 2.15pm New York. If you're keen, that's 6.15am Sydney.

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