It has been a bad week for the International Monetary Fund. The executive board of the Fund agreed earlier this week to a plan which would see the Fund sell about 403 metric tons of its gold (13 million ounces or so) to raise US$11 billion over the next few years. The Fund, which publishes research on the global economy and has to pay countless bureaucrats in Washington, is having trouble paying the bills.
Selling your capital assets to meet your living expenses seems like a bad strategy. You might as well eat your own seed corn for dinner over a fire stoked by the wood from your kitchen table. This strategy seems to suggest to us that the IMF is one of the post-World War Two institutions that may not survive the current financial shakeout (or will emerge in radically smaller form.)
The more urgent question is whether IMF gold sales will depress the gold price. The Fund has 3,217 metric tons of gold in its reserves and is a formidable potential seller/price depresser of the yellow metal. Gold, however, closed up in the futures trading by 2.1% to finish in New York at US $937.50.
If the U.S. dollar keeps making pathetic new lows (and its management by the Fed seems to suggest it will) then we reckon investment demand for gold as an inflation hedge will continue. London-based GFMS published a report yesterday in which it said gold would reach a “peak” between US$1,100 and US$1,200 either late this year or early in 2009.
Is that really the peak? Hmm. We’ll see. The investment demand for gold grows as the dollar gets weaker.
Below is a chart of the number of metric tons of gold held by the largest gold exchange traded fund in the States, GLD. You can see that since the fund launched in 2004, its rise has tracked the rise of the gold price with a few minor interruptions. GLD currently has 642 metric tons of gold (or at least it says it does…there is some debate in the gold bug community over whether GLD actually has this gold, but we’ll lave that aside for today.
While the IMF sells its gold to pay the rent, it also reported that it believes ‘s about US$1 trillion in total credit market losses, originating (but not ending) with the sub-prime mess. Specifically, the IMF said total losses and write offs would come to US$945 billion. US$565 billion of that is mortgage-related, with the rest coming from the commercial real estate and consumer lending market.
Now Wall Street and its friends in Europe have already written off about US$232 billion in losses. That means if the IMF is right, we’re barely a quarter of the way there. The IMF could be wrong, of course. It wouldn’t be the first time. But the premature declarations of an earnings recovery in the equity market are pretty fanciful, given the quantity if known unknowns and unknown unknowns lurking on corporate and personal balance sheets.
In much simpler terms, we still don’t know how many people are going to default on their mortgage in America. We know more and more of them are missing payments (delinquencies are up.) We know unemployment is rising (and that certainly doesn’t help). But we don’t know who’s going to make it through to the far side of the crisis and who won’t.
That makes it really hard to value the bonds backed my mortgages and that’s why the credit markets continue to exist in a state of suspended animation. Their soul-the buying and trading of debt-backed assets-is frozen.
Markets and Money