Who will buy the IMF's gold, and how will the sales be conducted...?
SO AT LAST, the US Congress has permitted its representative at the International Monetary Fund to vote to sell the 403 tonnes of gold the IMF bought from Brazil and Mexico 10 years ago, writes Julian Phillips of Gold Forecaster.
As it is not an individual member's gold we fully expect the members of the fund to okay its sale. The new legislation, part of the Obama administration's war and anti-drug financing bill, will permit US representatives to the IMF in Washington to agree to its planned sale of 13 million ounces of gold, one-eighth of the organization's holdings.
But since the financial state of the IMF has improved thanks to the credit crunch, with new loans acting on "assets" on its balance-sheet and booking new future income as they are repaid, the purpose of shoring up the IMF's own finances does not appear to not be the issue any more. Instead, we believe that the continuing attempt to sell this 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. And as the United States controls 16.83% of the votes of the IMF – and a majority of 85% is needed for any resolution to be passed – the permission of Congress was vital in allowing the sale to take place.
The next step is for a resolution at the IMF to be passed. We would think it may then take many months before the gold will be approved for sale by all member states. Because the Articles of Agreement limit the use of gold in the IMF' 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."
So a much bigger pair of questions that give us clarity on these sales are:
- Over what period will the gold be sold?
- How will the gold be sold?
To date, all we have from the IMF is that it's clear 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." But do not add anything more to this, as it does not tell us if they will sell on the 'open market', nor reference the way they have sold in the past through auctions.
The IMF's statement does seem 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:
- By the time the IMF members have approved the sale, the Central Bank Gold Agreement that ends on 26th September 2009 will almost certainly 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 IMF will be the only signatory.
- Members of the IMF will not be happy if the IMF 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 members will want to see the gold sold for the highest price they can get, and would frown upon a sale over time and favor a quick sale instead without risk taking.
Please look at the IMF statement above and you will see that the concept of "prevailing market prices" is of importance. Consequently, the pattern set by past sales will guide us to possible future events.
Between 1976 and 1980, the IMF sold approximately one-third (some 1,555 tonnes) of its gold through auctions and "restitution" sales. This was 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 35 Special Drawing Rights per ounce.; the other half was auctioned to the market to finance the Trust Fund, which supported concessional lending by the IMF to low-income countries.
These late 1970s' auctions were oversubscribed to the extent that the IMF's efforts to discredit gold didn't meet with the success they had hoped for. Hence these sales were terminated.
Off-market transactions in gold were proposed in December 1999, when the Executive Board authorized off-market transactions in gold of up to 14 million ounces to help finance IMF participation in the "Jubilee" initiative for Heavily Indebted Poor Countries (HIPC), the scheme whereby poor countries debt would be written off at the turn of the millennium. There is no evidence that these sales actually took place.
Brazil & Mexico sold gold to the IMF between December 1999 and April 2000, separate but closely linked transactions involving a total of 400 tonnes. These two members had financial obligations falling due to the IMF, and so this was not a sale into the open market, but an "internal sale". In the first step, the IMF sold gold to Brazil and Mexico 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 IMF immediately accepted back, at the same market price, the same amount of gold from those two members in settlement of each member's financial obligations. The net effect of these transactions was to leave the balance of the IMF' holdings of physical gold unchanged. However, the 403 tonnes that is now to be sold went directly into the hands of the IMF and out of the hands of the individual members.
Now, in those first sales of 1976-1980, some 500 tonnes of gold was offered at an auction where bids were delivered to the IMF. It then decided who the final buyers would be, and 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 IMF then realized 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, is the sale ostensibly to shore up the balance sheet of the IMF or to help poorer nations with new cash raised by the sale? We find the change of purpose suspect. 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.
This type of sale allows a large quantity of gold to be sold at one go, unlike the 'open' gold market, where small amounts of one to 10 tonnes can be dealt, but which will affect the daily price. Four hundred tonnes at open prices would crush the market, so should the IMF opt for selling through the 'open market', these sales would have to stretch over some 80 weeks or more if they were to average a more digestible five 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 IMF 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?
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 is $11.574 billion. Many a central bank can switch from the US Dollar to gold in this amount. Russia already holds some 4% of its foreign currency reserves in gold, but wants to take this figure to 10%. Another 400 tonnes would take it to only 7.5%, so it would most likely welcome the opportunity.
China is an even more compelling case. But would they buy? They are at present Buying Gold at the rate of 3 to 5 tonnes a month for their foreign currency reserves. They are unlikely to increase this volume dramatically as it would drive the Gold Price upwards a long way, so sensitive has the market become to rumors of Chinese-state buying.
In the last few years central banks even in Europe (and Germany in particular) have endorsed gold as a desirable reserve asset. Their failure to sell off all their gold also proves their position. Now China and Russia are buyers, such a view is being emphasized by the developing nations. So clearly, gold is here to stay in the monetary system as the hold of the US Dollar weakens against other currencies and reserve assets. What's more, the central banks' statement detailing their gold sale agreements in 1999 and 2004 stated that gold would remain an important reserve asset.
Plus, we mustn'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. But the method of selling used is vital to the impact on the market, and makes it the key to the impact on the Gold Price itself.