Time Running Out for IMF Gold Sales

The IMF has 88 tonnes of gold still to sell. Time's running out for the central banks who want it...

SO THE CENTRAL BANK of Bangladesh bought 10 tonnes of Gold Bullion last week from the IMF, notes Julian Phillips at the GoldForecaster.

This leaves 88.3 tonnes still to sell. Who might buy it?

The 10 tonnes that Bangladesh bought cost them around $1260 an ounce. So price was not a determinant in the matter. This may surprise many, but it highlights something about why central banks in general are Buying Gold now.

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 US China faceoff over the Yuan exchange rate against the Dollar. That leaves us uncertain at the prospect of unstable currency markets, and this has vastly increased the attraction of Buying Gold as a reserve asset.

As such, the price paid for gold in foreign exchange reserves is hardly relevant. Because when that dark and rainy day comes when owning gold is what matters, 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.

The International Monetary Fund (IMF) slated 403 tonnes for sale starting in summer 2009. It has since  chosen to sell that gold in only two ways:

1. Selling direct to central banks, announcing each sale after its completion;
2. Selling the remaining gold on the open market, through the bullion banks, over time and in a manner that would not influence the price.

This second route has resulted in just a couple of tonnes being sold in one go, right up to 15 or more tonnes sold in any month.

Now, you may be surprised that China has not made a direct bid for the IMF's gold, but there are good reasons why they have not bid. 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 People's Bank. Only at that point does the central bank declare it has bought it.

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 that it would precipitate such a jump in the Gold Price that the market could destabilize and China 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. They 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 to other private funds and sovereign wealth funds very quickly after the initial announcement to sell gold had been made by the IMF In fact, there are many non-central bank institutions that want to approach the IMF to buy the gold, but the two selling routes are inviolate. This means that, with only 88.3 tonnes left to sell it the opportunity to Buy Gold in a large amount is slowly disappearing.

A potential buyer could have been India, who made the largest purchase of IMF gold at 200 tonnes last October. Just after India bought the 200 tonnes of 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 who know and love gold, the most likely buyers will be from that part of the world, not 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 6 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 soon. These will come anytime from now and over the next 6 months. We would not be surprised is the entire remaining amount goes in one fell swoop, soon. No-one can say who for sure will be buyers.
 
The IMF's announcement that IMF gold sales are complete will be a trumpet signal to the market that supplies have narrowed. Then what?

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