The Reserve Bank of India has bought 200 tonnes of gold from the International Monetary Fund for US$6.7 billion (S$9.4 billion). It shows an appetite for diversifying its holdings to protect against the slumping dollar. India purchased the gold at an average price of $1,045 an ounce. Gold for immediate delivery was little changed at $1,059.72 an ounce in Singapore trading Tuesday (November 3), about $11 below its record $1,070.80 an ounce reached on October 14.

These 200 tons represent half the 400 ton of gold the IMF announced in September that it would sell to raise money to shore up its capital. The IMF is under pressure to bail out many countries facing financial crisis. These 400 ton also represent one-eighth of the IMF's gold reserves.

The IMF's gold sale is not a normal market transaction. In financial history, whenever the US dollar faces a crisis of confidence, gold reserves are sold out to shore up the greenback. The value of the US dollar goes in perfect negative correlation with the gold price. In short, if the US dollar goes down, the gold price goes up. We are not sure whether the IMF is now trying to come to the US dollar's rescue.

Secondly, the IMF's sale has raised the profile of gold even higher at this particular juncture when confidence in paper currencies is waning. Gold is now increasingly being recognised as having store value, like currencies, even of more value. For gold is gold - unlike paper currencies, which are subject to abuse.

Central banks can print money as they like, to create inflation and to shore up the financial system and the economy. But they can't print gold. Many investors now are predicting that a gold rally is just at the beginning of a long haul, as paper currencies lose their charm and credibility.

Thirdly, the IMF has chosen to sell its gold holdings to the Reserve Bank of India, instead of to China. So what are the Chinese thinking now? Over the past year, China has been vocal in calling for the adoption of a new global reserve currency to replace the US dollar. This irks the US. For the US, losing the global reserve currency status would undermine its standing in the international community and its ability to create wealth out of thin air.

Since the abolition of the gold standard in 1971, the US dollar has been issued without any reserve backup. China, which holds about $2 trillion in dollar reserves, must be disturbed at this latest IMF move, which has kept it in the cold. In the meantime, China is trying to promote its yuan as an international currency.

However, no matter how much of its gold reserves the IMF sells, it will not be able to shore up the dollar. The greenback is now on a declining path, with bubbles in the US Treasury and government debt, a rising deficit, and a problematic financial system. The only way to restore confidence in the dollar is by the US showing that it is willing to live within its means. So far the Obama administration has not shown that it is taking such measures. With this, the gold price will continue to rise.