Gold News

Gold, the IMF Sales & South Africa

Joining the dots between gold investment, the IMF, and South Africa's fast-falling mining output...

"GOLD FALLS on IMF sales concerns," read a headline at the BBC news page.

   The IMF has about 3,217 tonnes of Gold Bullion. Why would it sell it?

   "By revaluing its holdings, the IMF may be able to sell billions of dollars of gold and use the cash to cancel debts owed by the world's poorest nations," the BBC explains.

   "The plan was put forward by G7 finance ministers over the weekend. The price of gold fell to $413.50 an ounce in Asia, before rebounding slightly in early European trading..."

   But wait...Isn't the Gold Price trading around $900 per ounce? Why does the BBC say $413.50...?

   Oh yes, but of course! That BBC article was written back in 2005. And for whatever reason, whenever the price of Gold hits some technical resistance, someone trots out the idea of central bank or IMF sales to swamp the market and keep the Gold Price down.

   Or so it seems. Just keep in mind that central banks and the IMF have about 28,500 thousand tonnes of gold between them. Private investors, including Asia's jewelry owners – who view the metal as an investment as much as an adornment – have about 128,000 tonnes. So the idea that central banks can flood the Gold Market to depress the price is a bit rich. Real gold manipulation is far more complex.

   Still, it might make sense for the IMF today. The fund spends about $1 billion a year in loans to the developing world, but only makes about $600 million in loan repayments. Talk about a bad business!

   The market value of the 103 million ounces of gold held by the IMF is considerably higher today than it was five years ago, up to about $92 billion from $23 billion. What's more, the plan floated at last weekend's G7 meeting was to sell just 400 tonnes of IMF gold, or about 12.9 million ounces.

   That would generate about $11.5 billion in revenue at an average gold price of $900.

   Granted, lending to the developing world is a bad business. But you have to assume the IMF would not flood the market with gold, only to lower Gold Prices and the money the fund would receive from any planned gold sales, not to mention lowering the value of the rest of its gold. Even if that was what Gordon Brown's famous gold sales did for the United Kingdom.

   We think it's safe to assume that when you factor in declining gold mining output in South Africa, the addition of 400 tonnes of IMF gold on to the market is not going to crash the price of Investment Gold. It probably just means gold investors can increase their holdings by, say 400 tonnes.

   What exactly is going on in South African gold mining output? We know the state power company, Eskom, has called for a 10% reduction in industrial and commercial usage indefinitely. It says the rationing of electricity may not be far off, and that the crisis will last at least six months.

   Coal stockpiles to run South Africa's generating facilities are low. And in the gold mining industry, a 10% reduction in power means a 20% reduction in output owing to all the systems (ventilation, pumping) that must be in operation for a mine to operate. Platinum group metals, of which South Africa is a major producer, should continue to benefit, as should gold.

   It remains the No.2 producer, now behind China. But what in the world will happen to South Africa as an economy and a country? Will it need to call on the IMF for help, not least if the Gold Price turns tail...?

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles
 

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