Lately the metals markets have been abuzz with speculation about the meaning, and implications, of proposed International Monetary Fund (IMF) gold sale.
This potential development came about because the IMF finds itself on shaky financial ground. It is facing a shortfall of about $105 million this fiscal year (ending April 30, 2007), a deficit which is projected to balloon to $185 million in 2008 and $244 million by ’09.
There are any number of reasons advanced for this deteriorating balance sheet, the most common one being that many formerly cash-strapped Third World countries are experiencing enough prosperity to make early repayment of loans-Indonesia, Serbia, Uruguay and Ecuador are among those doing so this year-thereby cutting down on the interest income the IMF relies upon to cover operating expenses.
Though that may be a central part of the problem, the IMF should take a long look at its own bloat as well. In the past ten years, its annual budget has doubled to nearly $1 billion. As Devesh Kapur, an economist at the University of Pennsylvania, puts it, “Costs at the fund have been allowed to get out of control. It now has a bigger staff and budget than its role justifies.”
Be that as it may, IMF officials determined that sources of revenue other than lending income needed to be developed. And thus the Committee to Study Sustainable Long-Term Financing was convened last May by IMF Chief Rodrigo Rato. Also known as the Crockett Committee-after Chairman Andrew Crockett, former director of the Bank for International Settlements and now President of JPMorgan Chase-it consisted of a small group of eight “eminent persons,” namely: Crockett; former Fed Chair Alan Greenspan; Mohamed el-Erian, CEO of Harvard Management Co.; Tito Mboweni, governor of the South African Reserve Bank; Guillermo Ortiz, governor of the Bank of Mexico; Hamad al-Sayari, governor of the Saudi Monetary Agency; Jean-Claude Trichet, president of the European Central Bank; and Zhou Xiaochuan, governor of the People’s Bank of China. The committee released its report on January 31 of this year.
During the press briefing that followed, Crockett said that the committee favored the “creation of an endowment-were it to be possible-that would provide income that could be relied upon over a period of time without having to ask members.”
The “more attractive source” for this “is to use the fund’s resources of gold, and so the report does suggest that it would be appropriate and possible to […] sell a part of the fund’s gold holdings, and to devote the resources obtained from that to the creation of an endowment.”
The sale could be as much as 400 metric tons (12.9 million ounces), which, valuing the metal at a conservative $500/ounce (the past two years’ average), would net the IMF a minimum of $6.6 billion. That amount, invested, would be expected to generate $195 million in annual income. Of course, if current prices hold for the duration of the sales period, those numbers would be substantially higher.
Crockett noted that the 400-ton figure corresponds to IMF gold that was sold and repurchased in an off-market transaction about 6 years ago. It is about 12.5% of the Fund’s total holdings.
The Committee, whose recommendations have been referred to the IMF’s executive committee for debate, took care to emphasize that the proposed sales should be “ring-fenced […] to limit their market impacts.” (Longtime Fed watchers chuckled at the wording, noting that such phrases are a dead giveaway of Greenspan participation.) To this end, Crockett promised the following safeguards:
“In the first instance, the amount should be limited to the 400 tonnes I mentioned without envisaging any additional sales.
“Secondly, the sales should take place within the existing Central Bank Gold Agreement [CBGA], that is to say it would not be additional to sales already programmed by central banks, but would be accommodated by reductions in the amounts of gold that central banks might sell under the [CBGA].
“And thirdly, we have emphasized that the sale should be undertaken in a very careful way in terms of their periodicity amounts and manner of sale such as not to disturb the market.”
The CBGA limits signatory central banks (all of the major ones, excluding only the U.S.) to sales of 500 tons/year. In 2006, however, the banks released only about 350 tons. Thus, the IMF committee appears to be saying that it proposes taking up whatever slack exists this year, while not allowing its sales to push the amount of new gold coming to market over the pre-set 500-ton limit.
It is important to remember a couple of things here.
First, it’s not the IMF’s gold. The metal belongs to the depositor nations, the largest of which is the U.S. The Aamerican taxpayers own that gold, and thus have a very real interest in what happens to it.
Second, the IMF is prohibited from trading in gold. Its bylaws state that it does not “have the authority to buy gold,” nor may it “engage in any other gold transactions-such as loans, leases, swaps, or use of gold as collateral.”
What it can do is “accept gold in the discharge of a member’s obligations” and “sell gold outright,” but the latter requires “an 85% majority of total voting power.” Since the U.S. controls about 17% of voting power, it can’t by itself make a deal happen. But it has the absolute authority to block one.
The Crockett Committee report is not the first time the notion of IMF gold sales has been floated. It’s an idea that has cropped up repeatedly in the past but has always failed, either because of American opposition or because of opposition among the more general membership, which includes many gold-producing nations that have an interest in keeping a floor under prices.
What will be the U.S. position this time around? We’ll have to wait and see, but if the past is prologue, there will be stiff opposition. The final decision on whether to veto or not rests with Congress, where Democrats in the past have fought IMF gold sales on the grounds that they would hurt impoverished nations. Sen. Harry Reid voted against them as minority whip, and might be expected to be consistent now that he’s majority leader. Or perhaps not, depending on which way present political winds are blowing.
While the IMF’s announced motive seems to make fiscal sense-provided one accepts that it has any need to be as big and meddlesome as it is-gold bugs immediately began looking for the story behind the story.
If the Gold Anti-Trust Action Committee (GATA) is correct in their contention that the American government has acted deliberately, in concert with the major central banks, to suppress the price of gold in order to mask the dollar’s inherent weakness (an effort in which Mr. Greenspan is alleged to have been a willing participant), then the IMF proposal plays right into such a conspiracy. Its hidden meaning could be that the IMF must help out with gold sales, because the CBGA signatories have become reluctant to part with enough of their reserves to keep a lid on prices and, in fact, may be pleased with the appreciation of their assets. Yearly sales boosted to the full 500 tons, thanks to IMF participation, should contribute to further price suppression. It’d be no great shocker if the IMF were doing the U.S.’ bidding.
In addition, it’s possible that some depositors, holding dollars and nervous about their decline, are making noise about getting their gold back. Propping up the buck through gold sales could be viewed as an aid to easing their fears.
Then there’s the China factor. Analyst Michael Kosares, writing on USAgold.com, says that, “There is no doubt in my mind that China would like to see the IMF sell all its 3,217 tonnes of gold, particularly if China might become a primary recipient. Without any fanfare China would happily write the check for all 3,217 tonnes. Otherwise, I can’t imagine why the Chinese central bank might have been included on this IMF committee, unless it was to demonstrate that the system is at least trying to get them some gold.”
Whatever the case, the most interesting part is what happens next. Not an easy call, given that neither the IMF nor the international gold trade are particularly transparent.
Many analysts, though, feel that the proposal will never fly. For example, Julian Phillips of GoldForecaster.com writes: “Should the member nations of the IMF find themselves in disagreement with a decision of the IMF to sell their gold, the possibility of this gold being returned to them is there. But should this option be used, the damage to the IMF of such a position [a minority objecting to the majority] would produce disunity in the global monetary system, which could prove extremely disruptive. [I] expect that the mere possibility of such a disruption, of itself, would persuade the majority not to sell any gold, but at best to revalue it.”
Even if a sale does come about, will it matter?
Many feel that the IMF’s actions are not liable to have much impact on gold, arguing that the distortions of the CBGA, even at maximum 500-ton strength, have already been fully factored into the current price and its trend line.
This is not to say that there couldn’t be a short-term downdraught. Sure there could be, especially as the IMF sales are formally announced. Some holders of gold, maybe a significant number, can be expected to sell into the news.
But with countries such as China, Russia and the nations of the Middle East itching to add to their reserves, even a large dump of physical metal onto the market is certain to be absorbed in short order.
Nor will countries be the only buyers. Beverly Hills investments manager Kenneth Gerbino wrote in 2005 about a similar IMF sales speculation, saying that any additional supply “would surely be snapped up by the bullion banks and mining companies that are ‘short’ somewhere between 10,000 and 12,000 tonnes, according to some very savvy analysts.” There’s no reason to think that’s changed much in the interim.
Gerbino could have been writing about the IMF when he concluded, “Central bankers will most likely continue, as usual, to scare the price of gold down from time to time by statements of gold sales. But they are all too keenly aware of the growing number of people who realize that the gold, not paper and ink, is the real stable monetary element.”
Finally, it is important to keep the relatively miniscule amount of gold sales we are talking about in perspective. In an era where over $1 trillion in derivatives trade globally each day, $6.6 billion in sales is just not that much money when compared to potential investor demand once the U.S. dollar goes into the free fall that Doug Casey, among others, now believe is imminent.
In other words, if IMF sales do happen, and if they depress gold’s price, that’s a buying opportunity… for bullion and especially for the high-quality junior exploration stocks that pack the most punch in a rising gold market.
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