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Of The IMF, The Bank Of England, Currencies And Gold

Commodities | Apr 16 2007

By Greg Peel

The 63-year old International Monetary Fund is yet again coming under scrutiny from the world’s finance ministers. The IMF is struggling financially as it finds it difficult to balance its own inflated costs against falling loan revenues. Countries such as Brazil, the Philippines and Uruguay have paid their loans off ahead of schedule, and fewer countries are now putting their hands up for assistance.

Whenever the IMF comes into focus, a now hackneyed call is made – the IMF should sell some of its vast gold reserves. In January, a panel chaired by the president of JP Morgan Chase (remember that name) urged the IMF to do exactly that.

Dow Jones reports that speaking in Washington at the International Monetary and Finance Committee spring meeting, Japanese finance minister Koji Omi also got in on the act. He proposed that the IMF sell its gold reserves to cover falling income, and that countries shouldn’t rely on exchange rate changes as a means of reducing the world’s trade imbalances. These should be addressed by each country looking to its own structural reforms, he suggested.

Omi’s views were echoed by British Chancellor of the Exchequer, Gordon Brown (remember that name) who found it “encouraging” that more countries had fallen into line with the view that IMF gold sales were the way to go.

The IMF is the world’s third largest holder of gold behind the US and Germany, with some 3,200 tonnes. To put that into perspective, the gold price dropped some US$30/oz last year when 45 tonnes were sold, and US$100/oz when 75 tonnes were sold by central banks. However, recent sales close to 50 tonnes have not managed to stymie gold’s current upward move.

Nevertheless, the call is not for the IMF to dump all of its gold at once. Heaven forbid. Gordon Brown is calling for “measured” sales and the managing director of the IMF has suggested sales would be limited to only one eighth of holdings (400t).

Not all countries and market participants are enamoured with the idea, however, and so the debate rages on.

US Treasury secretary Henry Paulson has come at the IMF in a different direction, suggesting the Fund review its 1977 charter to concentrate on the manipulation of currencies by developing nations. Read China in particular, but also South Korea and Taiwan – all accused of boosting exports by keeping currency levels artificially low.

Conspiracy theorists would suggest Paulson’s comments are a screamingly laughable case of the pot calling the kettle black. But more on that later.

Bloomberg reports that the G7 is behind Paulson, releasing a statement suggesting “it is desirable that their [developing nations] effective exchange rates move so that necessary adjustments will occur” in international trade balances. Paulson’s comments come as no less than five bills aimed at slowing imports from China sit in US Congress, and after the US Commerce Department last month imposed sanctions on Chinese paper products.

Unsurprisingly, developing nations do not necessarily agree with the IMF currency crackdown proposals. The G24 (which includes Brazil and India) has suggested it “remains doubtful”. China declined an invitation to attend the Washington meeting.

In other news, Britain’s Sunday Times published an article this weekend in which it questioned the sale of half of the Bank of England’s gold reserves in May 1999. The sales were made at the bottom of the market and have to date cost the British taxpayer in excess of 2 billion pounds. London City bankers and gold traders, called in to be warned by Gordon Brown (yes, him) of the intended sales were reportedly appalled at the time. While Tony Blair and Gordon Brown made the political excuse at the time that they were acting on advice from the Bank of England, as had been the case for prime ministers for three hundred years, the BOE took the unusual step yesterday of defending itself against the Sunday Times allegations and noting that it had acted solely on the decision made by Her Majesty’s Treasury.

So critical were the sales considered at a time when gold looked about to break out from its lows, CEOs of Placer Dome, Newmont, Ashanti, Homestake, Gold Fields and Anglogold were driven to write an open letter to Tony Blair. They wanted Blair to come clean on suspicions raised by one Opposition MP in the House of Commons:

“Has the Government’s whole plan been simply to drive down the gold price by whatever means, fair or foul, to save the position of certain figures in the city which apparently, are so short and potentially in such trouble?"

And therein lies the crux of the matter. This is exactly the accusation made by many, including the Gold Anti-Trust Action (GATA) committee who strongly believe in evidence suggesting the gold price was manipulated then, and is still being manipulated today.

While US gold manipulation can be traced back to the Vietnam War, the situation in 1999 was that the world’s financial markets were staring down the barrel of total calamity. When hedge fund Long Term Capital Management went under in 1998 as a result of losses on Russian debt, it went down holding massive short gold positions. Those positions were covered by most of the world’s major investment banks. In other words, had the world’s major banks been forced to buy back those short positions in a gold market already set to break out, the whole global financial system could have collapsed.

The Sunday Times has established that two banks in particular – Deutsche Bank and JP Morgan (there’s that name again) – advised their clients the day before the Bank of England sales commenced that “gold was not going above US$290/oz”.

GATA maintains the UK government acted with the support of the US government in 1999, and that the US government has been selling gold at every opportunity since in order to stymie the metal’s price push. This is done in order to prop up the value of the struggling US dollar, and has allowed the US dollar to remain as the world’s reserve currency and for the US to become the world’s richest consumer nation. Gold sales are often made through leasing and derivative arrangements via “gold bank” agents such as Deutsche Bank and JP Morgan, amongst others.

Hence the irony implicit in Henry Paulson’s dissertation.

If GATA’s accusations are correct, rumour has it that the purported 30,000 tonnes of gold left in central banks around the world is really only a figure of 15,000 tonnes. This forms the basis of GATA’s belief that the gold price will soon rise astronomically.

These accusations are denied by governments and by other gold market observers, although they continue to gain currency within the global gold market. The IMF is currently considering initiatives to realign its gold accounting methods to more correctly take into account non-physical gold sales. These initiatives are being resisted by some members of the IMF board, including CEOs of aforementioned “gold banks”.

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