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Financial markets got a jolt on Tuesday after learning that India purchased an eye-popping 200 metric tons of gold from the IMF, with a value of $6.7 bn.

Gold prices climbed to $1080/ounce with investors and central bankers worrying that this was one more sign of the impending end of the US dollar’s reign as the world’s reserve currency of choice. If central banks around the globe decide to dump the greenback, the dollar would undoubtedly experience a disastrous drop, with consequences for the global economy, for the US and, of course, for many of our dollar-denominated holdings.

The Reserve Bank of India issued a terse statement saying the move was “part of the Reserve Bank’s foreign exchange reserves management operations.” Like other holders of US currency, the RBI worries not only about the recent slide in the dollar, but also about Washington’s Himalayan-sized national debt. The towering debt makes it hard to see across the economic horizon.

The question now is whether the dollar will continue its slide and gold will keep scaling new heights.

A few months ago, the IMF said it would sell one-eighth of its gold to raise cash for low-interest loans to poor countries. The massive inventory for sale threatened gold prices. China was expected to be the principal buyer so India’s move came as a surprise. But India bought only half of the IMF’s available inventory. Another 200 metric tones remain. China is a likely buyer. That, however, doesn’t mean that China will dump its dollars. Beijing has accumulated such enormous reserves that gold now makes up a negligible percentage. Even after a large purchase, China’s reserves would remain mostly US-denominated.

In fact, the India move can be viewed without alarm because India too has a relatively small percentage of its reserves in gold. This was not wholesale dollar-dumping. The purchase brings gold to 6 from just 4% of reserves. That is a much lower percentage than most European countries. Other Asians, perhaps South Korea and Taiwan, may choose to add to their gold holdings.

Anyone watching the dollar and US debt will want to diversify, but that does not yet spell doom for the dollar, especially because by dumping greenbacks, large holders could crush their own portfolios. That means gold is likely to make more gains as part of that global diversification drive, but it does not make sense to expect the sky to be the limit for gold prices.

When the Fed finally raises rates in the US, the dollar will reverse course and gold’s gains may end — at least for a while.

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