At last, the U.S. Congress has permitted the U.S. representative at the I.M.F. to vote to sell the 403 tonnes of gold the I.M.F. bought from Brazil and Mexico. As it is not an individual member’s gold we fully expect the members of the fund to OK its sale. The legislation will permit U.S. representatives to the I.M.F. to agree to its planned sale of 13 million ounces of gold, one-eighth of the organization's holdings. As the financial state of the I.M.F. has improved [due to the credit crunch], the purpose of shoring up the I.M.F. balance sheet appears to not be the issue any more. We believe that the continuing attempts to sell the gold has, as its purpose, a final attempt to confirm that paper money is more important than gold, irrespective of what the proceeds are used for. If we are right, the sale will follow the pattern of the Central Bank Gold Agreement sales coming to an end on 26th September 2009.
As the U.S. controls 16.83% of the votes of the I.M.F. and a majority of 85% is needed for any resolution to be passed, the permission of Congress was important in allowing the sale to take place. The next step is for a resolution at the I.M.F. to be passed. We would think that it may take many months before the gold will be approved for sale by all member states.
The Articles of Agreement limit the use of gold in the I.M.F.' operations and transactions as follows: - Transactions in gold require an 85% majority of total voting power. The IMF may sell gold outright on the basis of prevailing market price, and may accept gold in the discharge of a member's obligations at an agreed price on the basis of prices in the market at the time of acceptance.
A much bigger pair of questions that give us clarity on these sales, are; over what period will the gold be sold and how?
How Will the Gold Be Sold and Over What Period?
To date, all we have from the I.M.F. is that the I.M.F. has made it clear that any gold sales will be conducted within the Central Bank Gold Agreement and will not disrupt the smooth functioning of the gold market.
To be frank this is a statement that can be interpreted any way you want except that they are pledging that whatever way and however long it takes it will not harm the gold price. Read that as, “The price of gold will not be made to fall through these sales”. We suggest you add nothing more to this, as it does not tell us if they will sell on the ‘open market’, or the way they have sold in the past through auctions. It seems to imply that the sales will be handled in the same way as the sales from the current Central Bank Gold Agreement, but does not say so! This does not tell us even the quantity to be sold at any one time. At the moment the market is assuming that the sales will be on the ‘open market’ and likely stretched out over some years.
Two points must be made here: -
1. By the time the I.M.F. members have approved of the sale, the Central Bank Gold Agreement that ends on 26th September 2009 will be almost over or will be over. Usually by this point in time with such an Agreement, the signatories would have confirmed another Agreement will begin as the current one ends. This has not happened! Current sales appear to be coming from France alone, so we have to ask with whom will a new agreement be made? If none is made the I.M.F. will be the only seller.
2. The members of the I.M.F. will not be happy if the I.M.F. takes upon itself to drag out the sales over several years, taking the risk of lower prices but speculating that it may achieve higher prices in selling the gold over a long period. We believe that the members will want to see the gold sold for the highest price they can get and would frown upon a sale over time and would favor a sale quickly, without risk taking. Please look at the I.M.F. statement above and you will see that the concept of “prevailing market prices” is of importance here? Consequently, the pattern set by past sales will guide us to possible future events?
Past Sales of I.M.F. Gold
Auctions and "restitution" sales (1976-80). The I.M.F. sold approximately one-third or 1,555 tonnes of gold (50 million ounces) of its then-existing gold holdings following an agreement by its members to reduce the role of gold in the international monetary system. Half of this amount was sold in restitution to members at the then-official price of SDR 35 per ounce; the other half was auctioned to the market to finance the Trust Fund, which supported concessional lending by the I.M.F. to low-income countries. [These auctions were oversubscribed to the extent that the I.M.F. realized their efforts to discredit gold were not meeting with the success they had hoped for. Hence these sales were terminated.]
Off-market transactions in gold. In December 1999, the Executive Board authorized off-market transactions in gold of up to 14 million ounces to help finance I.M.F. participation in the H.I.P.C. Initiative, the scheme whereby poor countries debt would be written off. There is no evidence that these sales actually took place.
Brazil & Mexican sales. Between December 1999 and April 2000, separate but closely linked transactions involving a total of 400 tonnes [12.9 million ounces] of gold were carried out between the I.M.F. and two members (Brazil and Mexico) that had financial obligations falling due to the I.M.F. But this was not a sale into the open market, but an “internal sale”. In the first step, the I.M.F. sold gold to the member at the prevailing market price and the profits were placed in a special account and then invested for the benefit of the HIPC Initiative. In the second step, the I.M.F. immediately accepted back, at the same market price, the same amount of gold from the member in settlement of that member's financial obligations falling due to the Fund. The net effect of these transactions was to leave the balance of the I.M.F.' holdings of physical gold unchanged. However, the 403 tonnes, that is now to be sold, went directly into the hands of the I.M.F. and out of the hands of the individual members.
Types of Sales used before.
1. In the first sale 500 tonnes of gold was offered at an auction where bids were delivered to the I.M.F. who then decided who the final buyers would be. The bids had quite a range, but the salient point was that the offer of gold was well oversubscribed. The same happened in the next offering and did so a third time. The I.M.F. realized then that this was not lessening the role of gold in the monetary system, but showing them up as following a foolish course in parting with the gold. This time the sale is ostensibly to shore up the balance sheet of the I.M.F. or to ‘help poorer nation’? We find the change of purpose suspect?
2. Another main feature of an auction sale is that huge buyers were able to purchase the entire amount they wanted, at one single price for the entire amount sold. The same will be true of any such sale in the future.
Auction Sale. This type of sale allows a large quantity of gold to be sold at one go, unlike the ‘open’ gold market, where small amounts on one to 10 tonnes can be dealt in, but affect the daily price. 400 tonnes would crush the market! Should the I.M.F. opt for selling through the ‘open market’ the sales would have to stretch over around 80 or more weeks, at say, 5 tonnes a week. An auction would allow the entire amount to be sold at one price ‘off’ market, so leaving the market price unaffected. It would appear that this should be the route the I.M.F. goes, if it wants to maximize the price achieved and avoid any speculative stretching out of the sales over years. But is that their intent?
Big Buyers Attracted! With such a tonnage of gold available at one price, major buyers, from central banks to major institutions would have perhaps the only opportunity they will ever see to buy gold without disturbing the gold price. The value of 400 tonnes of gold at current market prices [$900 an ounce] is $11.574 billion. Many a central bank can switch from the U.S.4 to gold in this amount. Russia with around 4% of its reserves [536 tonnes] wants to take this figure to 10%. Another 400 tonnes would take it to only 7.5% so it would welcome the opportunity. China is an even more compelling case! Would they buy? They are at present buying in the region of 3 to 5 tonnes a month into their reserves at present. They are unlikely to increase this volume dramatically as this would drive the gold price upwards a long way.
In the last few years central banks even in Europe [Germany in particular] have endorsed gold as a desirable reserve asset [the very statement detailing the gold sale agreements stated that gold would remain an important reserve asset] by their failure to sell off all their gold. Now with China and Russia as buyers, such a view is being emphasized by the developing nations. Clearly, gold is here to stay in the monetary system as the hold of the U.S. dollar is weakening.
Of course don’t ignore some of the major private institutions or individuals that would like to buy a big volume of gold at one price! At an auction they will jostle with central banks to get the gold!
The method of selling is vital to the impact on the market of the sales and makes it the key to the impact on the gold price itself!
How Will the I.M.F. Gold Sales Affect the Gold Price?
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