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
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?
— 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?
— 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.
— 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.