India Drives Gold Higher

Updated with new record high gold price.

NEW YORK (TheStreet) -- India sends gold prices to a new high of $1186.

The Reserve Bank of India announced that it will consider buying the IMF's remaining stash of 201.3 tons of gold igniting gold prices. Central bank purchases often trigger momentum buying as investors invest in gold as an alternative asset.

Currently India has only 6% of its reserves in gold, after buying 200 tons from the IMF in early November. At one point the country had 20% and countries like the U.S. and Portugal have 70% and 90% respectively. India's 6% seems paltry in comparison. "Every time any kind of news comes out its instantaneously regarded as this is it, this is bullish, must be great" says Jon Nadler, senior analyst at Kitco.com.

India is paying up for gold buying the first 200 tons at a spot price of $1,045 and now considering buying the rest as gold inches towards $1,200. But Nadler thinks that India could be buying in order to play a larger role in the IMF as a voting member and that buying gold has less to do with a bullish outlook and more to do with keeping reserves in line with allocations. "Central banks in general look at foreign reserve management as an ongoing policy. They will buy when they feel the allocation is too small vis a vis reserves. Price is really not the issue it's a percentage issue."

Even though India represents a shift from central banks away from being net sellers of gold to being net buyers, it's still the weak U.S. dollar that is pushing prices to $1,200. "I think a lot of what is driving gold in the very near term is part of this weak dollar risk trade element and therefore I think having an extra bit of news like India coming through has driven the price even higher", says Nicholas Brooks, head of research and investment strategy for ETF Securities. "When central banks start looking at gold as a good diversifier away from the dollar it just confirms private investors' concerns about the types of policies put into place by governments right now."