First we look at the IMF and look at just how it will support gold.
The IMF Gold Sales
We have been waiting so long for clarity on the policy the IMF is to adopt with the sale of their 403.63 tons of gold. The IMF Executive Board has now approved the sale of 403.3 metric tons. The head of the IMF, Strauss-Kahn said, "These sales will be conducted in a responsible and transparent manner that avoids disruption of the gold market. Most importantly, the sales are strictly limited to 403.3 metric tons, which is one-eighth of the fund's total holdings, so the IMF will continue to hold a relatively large amount of its assets in gold."
Prior to selling the gold on the market, the IMF is prepared to sell the gold directly to central banks or other official sector holders. These sales to official sector holders will be conducted at market prices and would shift official gold holdings without changing total official gold holdings.
Any gold sales on the market would be phased over time, the IMF said. Regular external reporting on gold sales will also be provided to assure markets that gold sales are being conducted in a responsible manner.
Let's be clear on this, if the IMF is to offer this gold to other central banks before offering the gold to the 'open market' they are likely to receive bids that would certainly confirm that central banks [whether few or many is irrelevant] value gold in their reserves and are prepared to buy it in even at these prices! If all the 403 tons is sold this way, then that confirmation will elevate gold as a reserve asset and a measure of value.
If there is an amount left over, it will be sold in a manner that will not bring the price down brutally [avoids disruption of the gold market].
Which large $ surplus holding nations can afford this? Far more than just China or Russia! We expect the IMF is already receiving offers from these central banks. So will any of this gold make it to the open market? What if only 100 tons are left for the market, what if none is left? Sales of this gold to any central bank will be positive for the gold price. Sales of all of it will bring a confidence to the gold price that will send it to new heights!
We believe that this statement from Strauss-Kahn, in itself is extremely positive for the gold price and will represent confirmation of gold's role in the monetary system.
The New Central Bank Gold Agreement
Take a look at the Table above, on the tonnages of gold selling by the Central Bank Gold Agreement Signatories [in the latest Gold Forecaster – Subscribers only], over the last five years. With the final week of this Agreement on us, the future of European central bank selling becomes very clear to us.
As you can see, the original intention of the signatories to the Agreement was that they wanted to bring transparency to their gold sales, so as to make it clear to the world that they were not going to dump gold onto the market, a fear that had persisted for the previous 20 years prior to the "Washington Agreement." To that end, they announced the amounts they were going to sell in the future. It was not an announcement to sell an amount during the five years of the agreement, but an announcement of their total future sales, as you can see in the Table.
Some countries made no announcement and made unexpected sales. The E.C.B., Spain and Belgium were the only countries that did this. But Belgium has not sold any gold since 2006 and Spain has not sold since 2007.
However, it became clear that these were limited, with the exception of the E.C.B. who confirmed they had sold, after the event. They have sold each year of the Agreement. The question is, will they sell under the new Agreement starting September 26th 2009" [next week]?
More importantly, since Switzerland's announcement to sell an extra 150 tons, no announcements to sell have been made by any country that signed the Agreement. Take another look at this Table and you will see that the residual amounts still to be sold are very small and lie in the hands of countries that have not sold for the last three and two years respectively. Now add to that, that the number of signatories has increased substantially [with signatories who hold barely any gold anyway and with no announcements being made to sell from them] and you have a remarkable picture emerging. There appear to be no sellers among the signatories at all!
Yes, the agreement allows for up to 400 tons a year to be sold. But as we mentioned in an earlier essay, this 400 ton limit allows for the IMF to sell its 403 tons anyway it wishes under this agreement, in one shot, or over the period in dribs and drabs, whichever way they want to go. So this 400 tons is for the benefit not of the signatories, but for the IMF!
But will they buy? Two points must be made here: -
- The Agreement is an agreement to limit sales of gold and makes no reference to buying of gold.
- The original purpose of selling the gold was in support of a newly launched currency, the €. Now it is well established there is no reason to sell more, particularly when one considers how against national interests past sales have been shown to be by a rising gold price.
Their support of the gold price comes then from the termination of their sales, removing what was up to 400 tons supply from the market?
So will any central banks will be buyers? Russia has stated it wants to see 10% of its reserves in gold, but that is now several thousand tons of gold, just not available at anywhere near current prices. But they are on record as having bought in the 'open' market. They have bought up to 4 tons a month this year [9 tons in August] and from the end of last year. But they have made no announcement on whether they have been buying gold from local producers, before it reaches the open market. If they are buying locally, then the amount of 1 ton a week they are buying in the open market must be in addition to this. We will have to wait until the evidence is before us before we can say they bought over 300 tons this year.
At one point China held only 300 tons in the gold and foreign exchange reserves. Then an announcement was made that they had doubled this to 600. Now this year they again announced that they had been buying gold at the rate of 91 tons a year since then. At the moment this reserve level is 1,054 tons. The Chinese way of accounting and buying allows for this to be hidden. This past week we heard from Mr. Cheng of the Chinese government who made this extraordinary comment to Mr. Ambrose Evans-Pritchard of the Daily Telegraph, "Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market," he said. Why is this extraordinary? Because China produces the most gold in the world and can also buy from local producers, without a ripple in the market place. Unless it buys in the 'open' market, China cannot 'stimulate the market' except in the longer term because of the reduction in supply. It certainly does not make sense to buy in the 'open' market without buying local production too. While it is an assumption, at the moment, it appears that China is buying at least 91 tons a year [as they reported] and with local production of over 270 tons, it looks like they are buying around 90 - 360 tons a year?
Will other central banks start to buy gold? We know that South Africa has stated that they are gold buyers, but not the amount. We believe that other central banks will become buyers, if they are in a surplus position to do so. We could not say when. If the $ does crash [$1.60+: €1] it is more than likely than many central banks will become buyers, but we will only know after the event.
But while Russia and China are buying, the pressure on other banks to buy gold is growing as the $ and other currencies become subject to difficult questions.
So we do believe that gold already is attractive to central banks. They will keep silent on this at all times because of the fear of 'stimulating' the market. Nevertheless their actions and inactions are supporting if not raising the gold price!
This is a snippet from a recent issue of the Gold Forecaster with Subscriber-only parts excluded.
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