Who's left to sell now the IMF's Gold Bullion sales program is almost complete...?
AT THE END of October, the International Monetary Fund had 32.7 tonnes of the 403 tonnes of Gold Bullion it slated for sale in mid-2009 still left to be sold, writes Julian Phillips at the GoldForecaster.
In September they had sold 32 tonnes of gold, and then in October another 19.5 tonnes, again into the open market, rather than by direct deal with a central bank or other large buyer.
How long will it take to sell those last 32.7 tonnes? Should the IMF continue selling at the pace of September then we would expect to hear the announcement in December (and probably in the first half of the month, too). If they continued the slower pace of selling of October, then we will have to wait until January 2011 for the announcement. But either way, we believe that this is significant. Because it will signal the real end of "official" selling of gold.
The signatories of the Central Bank Gold Agreement – first agreed in Sept. 1999 – have not sold any Gold Bullion for more than a year now, excluding small sales to their domestic mints for Gold Coin production. Yes, we accept that they still have a 'ceiling' of 400 tonnes sales per year, as per the third CBGA, signed in Sept. last year. But this is now simply a gesture. Central banks are solid buyers, net net, primarily taking up their own local supplies first.
We also have to consider that more and more Gold Mining producer countries may well buy their own local production further, thus reducing the supply of gold to London (heart of the world's Gold Bullion market) and other centers.
We believe investors should also now accept that the main driving force behind the Gold Price rise is from central banks, with other Gold Investment demand following. More and more investment demand is coming not only from Asia, but amongst Western institutions, and not with a profit in mind either. Their investments are becoming more due to the instabilities and uncertainties that surround the developed world's currencies. So it is becoming more and more difficult to value assets internationally, with currencies swinging backwards and forwards as they are now. Gold Bullion is a better place to hold wealth in these stormy days.
All from the head of the World Bank down are also aware of the useful role that gold can play in acting as a 'value reference point'. Should this happen gold will have returned to the world of money in real terms, albeit in a slightly different role to the one it had in the past. We termed this in earlier issues of the Gold Forecaster as gold no longer being a 'means of exchange', but as a 'measure of value'.
So what happens to supply with this 400-tonne drop?
- With mine supply pretty inelastic there will be only a small additional flow from that source;
- With jewelry demand in the developed world back to former levels, only much higher prices will deter them;
- With industrial demand (particularly electronics) now a necessity, demand is unlikely to be deterred by higher prices;
- After an excellent monsoon and good harvests, plus GDP growth at 8.9%, Indian households are keen to Buy Gold at these prices and will not be deterred except by sharply higher prices;
- With the Chinese middle classes expanding rapidly as that country continues to develop, demand from there will continue to grow and most likely irrespective of the rising Gold Price.
Central bank demand is unlikely to abate no matter what the price, because their interest is solely in acquiring tonnages of gold. We note that as part of their ongoing program of gold buying Russia also bought 18.66 tonnes in October. (Compare that with IMF's sale of 19.5 tonnes). Not only are they buying local Gold Mining production but are present in the open market, too.
Consequently, the only additional source of supply will have to be scrap supply or supply from current holders. So we ask, "At what price will current holders sell?"
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