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IMF Gold Sales

What the IMF and CBGA gold announcements say about central bank demand...

WE HAVE BEEN waiting such a long time for clarity on how International Monetary Fund (IMF) is to conduct its gold sales of 403.63 tonnes, writes Julian Phillips of the

The IMF Executive Board has now approved those gold sales. Now the head of the IMF, Dominique Strauss-Kahn, has said "These sales will be conducted in a responsible and transparent manner that avoids disruption of the gold market.

"Most importantly, the sales are strictly limited to 403.3 metric tonnes, which is one-eighth of the fund's total holdings, so the IMF will continue to hold a relatively large amount of its assets in Gold."

Prior to selling this gold on the open market, the IMF is prepared to sell the gold directly to central banks or other official sector holders. These sales to official sector holders will be conducted at market prices and would shift official gold holdings without changing total official gold holdings.

Any IMF Gold Sales onto the open, international market would be phased over time, it says. Regular external reporting on gold sales will also be provided to assure markets that gold sales are being conducted in a responsible manner.

Let's be clear on this: If the IMF is to offer this Gold to other central banks before offering the gold to the open market they are likely to receive bids that would certainly confirm that central banks value gold in their reserves and are prepared to buy it in even at these prices! Whether it received a few or many bids is irrelevant. If all the 403 tonnes were sold this way, then that confirmation would elevate gold as a reserve asset and a measure of value once again.

And if there is an amount left over, it will be sold in a manner that will not brutally bring the Gold Price down, since it must avoid disruption of the gold market.

Which large Dollar surplus holding nations can afford to make this investment? Far more than just China or Russia, we believe. Indeed, we expect the IMF is already receiving offers from these central banks. So will any of this gold make it to the open market? What if only 100 tonnes are left for the market? What if none is left? Sales of this gold to any central bank will be positive for the Gold Price. Sales of all of it will bring a confidence to the market that will send it to new heights.

We believe that this statement from Strauss-Kahn, in itself extremely positive for the Gold Price, will represent confirmation of gold's role in the monetary system.

Just consider the tonnage sold by the Central Bank Gold Agreement Signatories over the last five years. With the final week of this Agreement now behind us, and the new Agreement begun (with its reduced 400-tonne annual ceiling), the future of European central bank selling becomes very clear.

The original intention of the signatories to the Agreement, first signed in 1999 and then renewed in 2004, was that they wanted to bring transparency to their gold sales, so as to make it clear to the world that they were not going to dump gold onto the market, a fear that had persisted for the previous 20 years prior to the "Washington Agreement".

To that end, the signatories – primarily the Western European central banks – announced in advance the amounts they were going to sell in the future. But it was not an announcement to sell a specific amount during the five years of the agreement; rather an announcement of their total possible future sales.

Some signatories made no announcement and thus made unexpected sales. Spain, Belgium and the Eurozone leader, the European Central Bank, were the only holders that did this. But Belgium has not sold any gold since 2006 and Spain has not sold since 2007.

More importantly, since Switzerland's announcement to sell an extra 150 tonnes, no announcements to sell have been made by any country that signed the Agreement. The residual amounts from previous announcements still remaining to be sold are very small, and they lie in the hands of countries that have not sold for the last three and two years respectively.

Now add to this fact that the number of signatories has increased substantially (bringing in signatories who hold barely any gold anyway and with no announcements being made to sell from them) and you have a remarkable picture emerging. There appear to be no sellers among the signatories at all!

Yes, the agreement allows for up to 400 tonnes a year to be sold. But as we mentioned in an earlier essay, this 400 tonne limit allows for the IMF to sell its 403 tonnes anyway it wishes under this agreement, in one shot, or over the period in dribs and drabs, whichever way they want to go. So this 400 tonne limit would seem to be for the benefit not of the signatories, but for the IMF!

Might Western central banks turn buyers instead? Two points must be made here:

  1. The Agreement is an agreement to limit sales of gold and makes no reference to Buying Gold;
  2. The original purpose of selling the gold was to support the newly launched currency, the Euro.

Now it is well established there is no reason to sell more gold, particularly when one considers how against national interests past sales have been shown to be by a rising Gold Price.

With gold having risen nearly fourfold since the first CBGA (the "Washington Agreement" of 10 years ago), gold has proved itself as an invaluable reserve asset since the turn of the century. The problem is that the United States and Europe are totally committed to paper currencies, with only a hidden and almost unrecognized backing of gold. Gold Bullion in this role is only designed for use in case of emergency ("in extremis"). For the US or Europe to be seen to be Buying Gold would be an admission of failure of the paper currency system. So while they will no longer be sellers of gold, we doubt they will be buyers in the next couple of years.

Their support of the Gold Price comes then from the termination of their sales, removing what was up to 400 tonnes supply from the market. But will any central banks outside the CBGA buy gold?

Russia has stated it wants to see 10% of its reserves in gold, but that is now several thousand tonnes of gold, just not available at anything like current prices. The Kremlin is also on record as having bought in the open market. They have bought up to four tonnes a month this year (including nine tonnes in August alone) and from the end of 2008. But they have made no announcement on whether they have been Buying Gold from local producers before it reaches the open market. If they are buying locally, then the amount of one tonne a week they are buying in the open market must be in addition to this. We will have to wait until the evidence is before us before we can say they bought over 300 tonnes this year.

As for China, at one point Beijing held only 300 tonnes in its gold and foreign exchange reserves. Then an announcement was made that they had doubled this to 600. Now this year, they again announced that they had been Buying Gold at the rate of 91 tonnes a year.

This reserve level is 1,054 tonnes at present, but the Chinese way of accounting and buying allows for new purchases to be hidden. This past week, we heard Siwei Cheng of the Chinese government, quoted by the UK press, saying "Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market."

Why is this extraordinary? Because Chinese gold mines produce the most gold in the world each year, and Beijing – like the Kremlin – can also buy from local producers, without causing a ripple in the market place.

Unless China buys in the open market, it cannot of course "stimulate the market" except in the longer term, due to the reduction in supply. It certainly does not make sense to buy in the open market without buying local production first. While it is an assumption, at the moment, it appears that China is buying at least 91 tonnes a year (as they reported). With local production estimated at over 270 tonnes, it looks like they may be buying between 90 and  360 tonnes a year.

Will other non-Western central banks start to Buy Gold? We know that South Africa has stated that they are gold buyers, but not yet revealed the amount. We believe that other central banks will become buyers if their currency reserves are in a surplus position to do so. Should the Dollar crash, falling to worse than $1.60 per Euro, it is more than likely than many central banks will become buyers, but we will only know this after the event.

While Russia and China are buying, the pressure on other banks to Buy Gold is growing as the Dollar and other currencies become subject to difficult questions. So we do believe that gold already is attractive to central banks. They will keep silent on this at all times because of the fear of "stimulating" the market. Nevertheless their actions and inactions are supporting if not raising the Gold Price.

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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