The potential, not just for currency crises, but serious foreign exchange structural problems, is huge. The international level of cooperation between nations is poor (as we are seeing in the U.S.-China faceoff over the yuan exchange rate against the dollar) leaving us uncertain at the prospect of unstable currency markets. This has vastly increased the attraction of gold as a reserve asset. As such, the price paid for gold in foreign exchange reserves is hardly relevant. When that dark and rainy day comes its use in settling pressing foreign obligations will heavily outweigh what the gold cost. It's having the gold to pay these obligations or guarantee foreign currency obligations that will matter then.
Why Can't Anybody Buy Anyway?
The IMF has chosen to sell its gold in just two ways:
- Sell directly to central banks and announce the sale after the sale is complete.
- Sell the remaining gold on the open market through the bullion banks over time in a manner that will not influence the price. This can result in just a couple of tons sold right up to 15+ tons sold in any month.
You may be surprised that China has not made a direct bid for the gold on sale from the IMF, but they have good reasons for not bidding. The Chinese central bank, the People's Bank of China, does not buy gold for its reserves direct from any market or auction. It uses an agency to do the buying. This agency can hold the gold for five years, and then pass it to the P. of C. Only at that point does the central bank declare it has bought gold. This anonymity is very important to China. If it were known that China had a serious long-term commitment to buying gold, there is no doubt it would precipitate such a jump in the gold price that the market could destabilize and China would not be able to access open market gold. Because of these considerations of a direct, and then announced, approach by China to the IMF, we doubt very much if China will now be a buyer. It will continue to buy in the open market anonymously.
If the IMF had been willing to sell direct to large institutions, such as China's buying agency if they had been a buyer, the gold would have been sold to it (and/or other private funds and sovereign wealth funds) very quickly after the IMF's initial announcement to sell gold. In fact, there are many non-central bank institutions that want to approach the IMF to buy goldóbut the two selling routes are inviolate. This means, with only 88.3 tons left to sell, the opportunity to buy gold in a large amount (only by central banks) is slowly disappearing.
A potential buyer could have been India, who made the largest purchase of IMF gold at 200 tons. Just after India bought the gold from the IMF, it stated that it may be a further buyer of this gold. Will they come in again, or will more Asian central banks come in for the first or second time? Well, both time and supply are running out for all central banks buyers.
As the buying has come from Asian countries that know and love gold, the most likely buyers will be from that part of the worldónot from the developed world's central banks. For the West, to be buyers may well be seen as undermining the paper currency world.
At the present rate of selling in the 'open' market, the IMF will have completed selling in six months time. So, the clock is ticking. That's why we expect one or more announcements from the IMF on further sales to central banks. These will come anytime from now and over the next six months. We would not be surprised is the entire remaining amount goes in one fell swoopósoon. No one can say who for sure will be buyers.
The IMF's announcement that gold sales are complete will be a trumpet signal to the market that supplies have narrowed. Then what?
Once Gone What Will Happen to Gold Demand/Supply and the Gold Price?
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