Congress to Approve IMF Gold Sale This Week

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"We see the more likely scenario developing in which China purchases the gold directly from the IMF."

This week the Supplemental Budget Appropriations Bill goes to committee to reconcile the differences between the House and Senate. While most eyes will be focused on the political horse trading that will surely be a part of the process, we will be focused on Title XIII of the bill.

Title XIII, Section 66 is titled, Approval to Sell a Limited Amount of the Fund's Gold. This section appears on page 105 of a 110 page document and is the authority the IMF has been waiting for since the G20 meeting in April. These gold sales should have no impact on the gold market for several reasons.

The amount of gold for the proposed sale is 12.97 million ounces (403.3 metric tons). This gold was acquired after the second amendment to the Fund's Articles of Agreement in April 1978. The Crockett Commission was formed to advise the IMF on the sale of this gold. The recommendation was to sell the gold in a manner that would not disrupt the gold market. It has come to be understood that any sales by the IMF would be subject to the Central Bank Gold Agreement (CBGA), which the IMF is not a signatory.

Hypothetically, if the IMF decided to snub its nose at the CBGA and dump its gold on the market, there still would be virtually no impact. The London Bullion Market is where virtually all central bank and official gold trading takes place. In April, the London Bullion Market transferred an average of 20.5 million ounces of gold every day.

We see the more likely scenario developing in which China purchases the gold directly from the IMF. Because there is a limit on yearly gold sales it would take a long-term forward contract to be executed. We do not think it is purely coincidence that Treasury Secy. Geithner is in China during the same week Congress is set to give approval to IMF gold sales.

Finally, a sale to China may upset India and several of the Gulf States as they all have expressed interest in purchasing the gold. If this occurs, nothing could be more bullish for the price of gold.

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