Gold price likely to result in a $1.37 bn dip in value of gold reserves

Gold reserves valued at end of each month at 90% of daily average price quoted at London during the month

Thanks to the sharp fall in international gold price, the value of gold reserves with RBI is also down. Given the fall in gold price during April, 2013, the value of RBI’s gold reserves is estimated to have fallen by 5.34% or by $1.37 billion.

The RBI values gold based on a pre-determined formula. Gold reserves are valued at the end of each month at 90% of the daily average price quoted at London during the month. The rupee equivalent is determined on the basis of the exchange rate prevailing on the last business day of the month.

As per this formula, average price of gold (in April so far) is $1,508 per ounce and 90% of that is $1,357. According to WSS, as on April 5, 2013 the value of the gold was $25,692 million.

If the 5.34% fall in price is considered, the value will stand reduced to $24,330 million. But, if the current price is considered, the value of gold reserves will fall further to $22,270 million, based on RBI’s formula to value gold.

RBI holds about 557.7 tonnes of gold as part of its reserves. Out of this, 200 tonnes were added to reserves in October 2010. Addition of gold to reserves was necessary because statutorily RBI is required to hold at least 5% of total reserves in the form of gold and in 2010 due to the rise in currency reserves gold’s share of reserves had fallen below the 5% mark.

Gold prices peaked in September 2011 to around $1,900 an ounce and as on September 2, 2011, the value of the gold in reserves with RBI was $ 28,319 million or Rs 130,323 crore. Hence, from the peak price levels, the value of gold reserves has fallen by nearly $4 billion based on RBI’s formula. And, if current gold prices are considered, the value will fall further by another $2 billion.