Commodities | Feb 01 2007
By Greg Peel
To think that anyone might sell a whole 400 tonnes (about US$6.6bn worth) of gold is one very scary prospect, particularly if you are long gold and still betting on a return to the highs. But this is exactly what an advisory panel that includes (ex fed chairman) Alan Greenspan and (European Central Bank president) Jean-Claude Trichet has recommended the IMF should do.
The reason is that the IMF, by its very nature, is set up to lose money. One way to stop losing money is for the IMF to switch out of some of its vast hoard (3,217t at last count) of non-interest-bearing gold and into other interest-bearing securities.
Founded at the end of World War II as a result of the Bretton Woods Agreement, the International Monetary Fund was initially the manager of all the gold that was held for the purpose of guaranteeing currency values under the gold standard. Between 1976 and 1980, the IMF made its last major gold sales after the US forced a collapse of the gold standard and a benchmarking to the US dollar (the Vietnam War sent the US broke). Then it sold 50Moz.
Today the IMF keeps watch over the currency, trade and economic policies of its 185 members, and provides them with advice. One of its functions is to provide low-cost loans to countries who get themselves into economic strife, provided that country addresses their problem of balance of payments or rampant inflation or whatever has caused that strife.
On this basis, the IMF is on a bet to nothing. While only a low cost loan to begin with, if that country follows the Fund’s guidelines, digs itself out of its economic hole, and pays the loan back before maturity, the Fund loses money. It’s nice to be charitable, but it can’t go on forever. This fiscal year, the IMF is projected to lose US$103m, next year US$185m, and the following year US$244m, reports Bloomberg.
The advisory panel estimates the IMF could make US$195m per year by investing the proceeds from its sold gold.
But this is a huge amount of gold – more than twice the total value of paper gold exchanged on Comex on any given day. How can it be sold without causing the gold price to collapse?
Firstly, the sales would be made over a number of years. Secondly, the sales would never see the market, but would be sold directly to central banks. There are enough central banks making noises about diversifying out of US dollars, so it shouldn’t be that hard to find buyers. It is a much simpler way for central banks to buy gold, instead of in the market. As the IMF is likely to want reasonable value for its gold, central bank buying would actually prove more bullish than IMF selling is bearish.
One group that is unsurprising sceptical about the whole thing is the Gold Anti-Trust Action (GATA) committee. “The central banks must be running low on gold”, is GATA’s response. GATA has long maintained that the dominant central banks hold far less gold than they let on.
The aforementioned advisory panel is chaired by Andrew Crockett, president of JP Morgan Chase International, “the great gold shorter for the central banks”, according to GATA, and formerly director of the Bank of International Settlements, “the great coordinator of the central bank gold price suppression scheme”. The latter accusation was confirmed by one of Crokett’s former BIS colleagues in 2005 (in not so many words).
Whatever the reasons, gold fans do not have a lot to worry about. Indeed, any sale would appear to have more bullish ramifications than bearish.