IMF Gold Sales Won’t Affect the Gold Market

Seeking Alpha explains why IMF gold sales won't affect the gold market.

(emphasis mine) [my comment]

Why IMF Gold Sales Won't Affect the Gold Market
by: Brian Kelly April 03, 2009

As part of the G20 Communiqué the leaders called on the IMF to sell gold to support developing countries. While spot gold was considerably weaker on this news, an examination of the statement illustrates the market's fears are unfounded. From the communiqué:

We have committed, consistent with the new income model, that additional resources from agreed sales of IMF gold will be used, together with surplus income, to provide $6 billion additional concessional and flexible finance for the poorest countries over the next 2 to 3 years. We call on the IMF to come forward with concrete proposals at the Spring Meetings;

The two keys to this statement are: (our emphasis)

1."...Additional resources from agreed sales of IMF gold..." There will not be additional gold sales, the IMF will direct proceeds from previously agreed upon sales to developing countries.

2."...To provide $6 billion...over the next 2 to 3 years..." These sales will likely be conducted through the London Bullion Market and will have little, if any, impact on the market. (Click to enlarge:)



As this table shows, $6 billion dollars in gold sales will have virtually no impact on the gold market. If needed, the IMF could sell all $6 billion in one day and still only be 28% of the average daily volume. However, the G20 calls on the IMF to make these sales over the next 2 to 3 years; these sales are a drop in the bucket for the gold market. Furthermore, a disorderly sale of gold by the IMF is unlikely due to its principles on how it treats the gold holdings.

IMF's Governing Principles on Gold

—As an undervalued asset held by the IMF, gold provides fundamental strength to its balance sheet. Any mobilization of IMF gold should avoid weakening its overall financial position.
— The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies.
—The IMF has a systemic responsibility to avoid causing disruptions to the functioning of the gold market.
—Profits from any gold sales should be used whenever feasible to create an investment fund, of which only the income should be used.

Disclosure: I am long GLD [I would stay away from GLD (see Risks in owning GLD)] and GDX [Disclosure: I am long physical gold.]

IMF answers Frequently Asked Questions on its gold sales.

Q. Why is the IMF considering gold sales?

A.
— The IMF's finances have become unsustainable following a large decline in credit outstanding in recent years. In the absence of measures, an income shortfall of $165 million in FY2007 is expected to widen to about $400 million by FY2010.

— The
report of the Committee of Eminent Persons chaired by Andrew Crockett (the Crockett Committee) recommended that the IMF adopt a new income model with more diverse sources of income. (Other committee members are Mohamed A. El-Erian, Alan Greenspan, Tito Mboweni, Guillermo Ortiz, Hamad Al-Sayari, Jean-Claude Trichet, and Zhou Xiaochuan).

— One of the income sources the Committee proposed is the creation of an endowment funded from the proceeds of strictly limited gold sales to be carried out within safeguards to avoid disruption of the gold market.


Q. What is the expected volume of gold sales?

A.
— The Crockett Committee recommended that gold sales be strictly limited to the gold the IMF has acquired after the Second Amendment, which amounts to
12.97 million ounces (403.3 metric tons), equivalent to one-eighth of the IMF's total gold holdings.

As noted above, there is no provision in the Articles to restitute this portion of the IMF's gold holdings to members of the IMF.


Q. When are the sales going to take place?

A.
No Executive Board decision to sell gold has been taken, so
no timetable for sales has yet been set.

— If gold is sold on the market, rather than to another official gold holder
["official gold holder" = central banks interested in buying gold (China, Russia, etc...], the Crockett Committee recommended that such
sales be phased over time in order to avoid disruption of the gold market.

Q. How will disruption of the gold market be avoided?

A. The Crockett Committee recommended a number of safeguards on gold sales to avoid disruption of the gold market
:

— The Committee recommended
a firm limit on the volume of gold sales as a key safeguard
, given the IMF's standing as the third largest official holder of gold.
The Committee recommended that the IMF's gold sales should not add to the announced volume of sales from official sources.
Hence, the IMF's gold sales should be coordinated with current and future Central Bank Gold Agreements (CBGA). (Under the current CBGA, a group of European central banks have agreed to limit their gold sales to no more than 500 metric tons annually).
Phasing of IMF gold sales over time is also recommended by the Crockett Committee to avoid disruption of the gold market, together with careful handling of the public communications related to gold sales.

My reaction: IMF gold sales will have virtually no impact on the gold market.

1)
The IMFs board approved a proposal in April 2008 to sell 403.3 tons of bullion to help close the Washington-based lenders annual deficit.

2) No Executive Board decision to sell gold has been taken. (Many steps, such as the US congress approving the sale, still need to be taken)


3)
No timetable for sales has yet been set.

4)
The G20 calls on the IMF to phase these sales over the next 2 to 3 years.

Conclusion: The IMF gold sales are a non-issue.

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18 Responses to IMF Gold Sales Won’t Affect the Gold Market

  1. Bowtie says:

    Since the announcement of gold sales, gold has lost quite a bit of value in term's of dollars. I think gold still has a little further to drop because the media makes it seem like gold is worthless now and the economy is fixed.

    I can't see it falling below 800, if it does I'll be buying.

  2. Anonymous says:

    Anything is possible, but I think most of the people buying gold are informed investors and probably speculators. A gold buying frenzy doesn't appear to have hit the mainstream public yet. The recent drop in gold could be the speculators getting out or just a knee-jerk reaction to the IMF statement. Gold has technical support around the 880-900 level, so if it does drop below those levels, it could trigger stop-loss sales and go lower. But since I am in it for the long haul, a drop in gold would just create a great buying opportunity.

  3. Tyrone says:

    9 Billion? Wake me up when they start talking 'real' figures. Trillions are the new billion, at least in the fiat world.
    BWAHAHAHA

  4. Robert says:

    The given reason for the gold sales (helping poor countries) is farcical.

    I think this just highlights how much the gold market is balanced on a relatively small amounts of the physical metal.

  5. Anonymous says:

    Well, you may think the should not affect, but they are already affecting. Psicology is everything.

  6. Jay Dee says:

    Hi, here is the ling of Bob Pretcher on gold:
    http://www.elliottwave.com/club/protected/gold-and-recessions-0803THE/default.aspx
    I would appreciate some comments on that. It is free och charge access - it is just necessary to make password and login.
    In the text of ElliotWave I found just one thing that seems to be not right - if many bond value might go to 0 and on the other hand this depression is going to be the worst of 300 years - why in the fiat currency - currencies would not go to 0. But this is only one argument I found against his theory. All his arguments are OK.

  7. Anonymous says:

    Big banks and big funds are suppressing the price of paper gold to save themselves from shorts and this is a chance to save myself by buying physical gold. On the other hand, this will encourage more and more calls for deliveries at London. The paper gold market is very fragile at the moment.

  8. Cornholio says:

    Gold is worth $400/ounce to me. I will short to $400, and go long if/when it bounces back up to $550.

    Be wary.

  9. Anonymous says:

    Hi,

    the markets do not seem to notice that or think that the SDR's already are the long term replacement of the Dollar (see http://www.washingtonsblog.com/2009/04/was-sdr-just-chosen-as-new-world.html).

    Whatever... It is not clear to me of how to stop the debt pyramid in the long term... whatever "long" might be. Until then, "Gold" will by a very tricky investment. The "flip-over" time will be pushed as far ahead as possible while the systemic risks increase.

    Since the crisis only the accounting standards got made soft, but internationally no actual law was passed that puts restrictions on that what brought us the crisis. Why? If that stuff is forbidden, the whole pyramid scheme would come down in weeks.

    So the question to all who read this blog: What is the scenarion within the next 4, 12 and 36 weeks?

  10. Bowtie says:

    I think the unraveling of the fiat system will take much longer than anyone on this site anticipates. We have officially been off the gold standard for more than 30 years and the fiat system is still "functioning". Mises and Rothbard knew this system couldn't last but neither of them thought it would last as long as it has so far.

  11. Osama futures (June2009) are less 5% and with volume USD15,000.
    http://www.intrade.com/jsp/intrade/common/c_cd.jsp?conDetailID=646528
    It does not prevent to sell billions of DOD derivatives to us turkeys every year ;)

  12. Anonymous says:

    @bowtie

    The question is, when it fails how fast does it fail?

    With fail, i mean the final, real, visible and unstoppable way downwards - something like Argentina or Russia, when Banks are shut down and no or only limited ATM access does exist...

    Does this scenario unfold overnight or are there so much clear and visible signs that one then has some days to prepare? Some say last year we where quite close to that event, but who knows...

  13. Bowtie says:

    Undoubtedly there will be such a failure - the final, real, visible and unstoppable way downwards. I am just pessimistic... I think the time frame is probably much larger than anyone anticipates.

  14. Martijn says:

    Oops boys, everyone should be real careful now. Cornholio is shorting gold until 400!

    I've sure sold mine upon reading that..

  15. Pluto says:

    When will "it" fail, how long will it take, and how will you know?

    If by "it" you are referring to the USDollar, I've structured my positions on this scenario (this is a holding strategy, not a trading strategy):

    I expect a Dollar revaluation (collapse) before the end of the year (this will send the stock market into great highs, of course, but not great value).

    How long will it take? Technically, 36 hours. But I imagine it will be dragged out to several weeks.

    How will you know? Look for the GBPound to collapse first.

    I hold a chunk of cash outside the bank, for safety sake. To optimize that, I am now exchanging some of it at http://ezforex.com/ and holding Euros, etc. rather than putting it in the bank.

    One person's opinion.

  16. Jay Dee says:

    Hi All,
    Please be carefull with EURO. If EURO is safe - I would not invest in gold - but just in this currency. If GBP and then USD will collapse - then collaps of EUR is inevitable. Strains in EU nations having EUR are already tremendous, they have different approaches for recessions, Trichet is thinking about printing money and calculating what will be better for Eastern EU - bail out by IMF or let them into with secondary membership (lack of vote in ECB)- knowing that majority of these banking systems is from EUR countries. So they (Western EU) will be hited one way or another. In addition Japan is indebted like a hell. I have impression that is USD will collapse - all the system of fiat money will collapse with all consequences.

  17. Anonymous says:

    Eric, I'm a Forex trader but made some nice change shorting paper GOLD today.

    However in the process of zooming out on a hourly chart, looks like a bullish flag starting to form. I did the Fibonacci Projections and with the exception of more and more manipulation, probably looking at around $1400 Gold as the next major resistance level IMO.

    I do hold a lot of Silver but am thinking about diverting some assets to physical gold as the bull flag sets a newer low on it's trading channel depending how tomorrow's action goes.

    Anyway, good job on the blog. Appreciate the insights. Lots of good info here to at least consider and filter through for myself.

    Ed in CA

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