By Julian D W Phillips
Most commenators we now read are taking the potential IMF Gold Sales as a foregone conclusion, says Julian Phillips of the Gold Forecaster...
But the International Monetary Fund's 403 tonne sale is by no means a foregone conclusion, not with the unknown quantity of the US Congress who are fully aware of just how good an Investment Gold has been and will likely be still to approve the decision with their casting vote. Congress blocked the idea of IMF Gold Sales last time it was proposed, too.
Of greater importance again is the question of how these sales could affect the Gold Price. The answer is exceptionally positive, after we consider the views of the IMF itself on just how the sales will be orchestrated.
For now, the focus is on whether the sales will actually take place. The Executive of the IMF has approved the sale. But the US Congress, if they approve the IMF gold sales, will have to give the nod to 16.83% of the members' votes at the IMF.
Let's next consider the likelihood that the sales will be finally approved what then? Just how will these IMF gold sales move forward in the light of the intriguing statements coming from the IMF's executives themselves?
IMF Finance Department director Michael Kuhn said The gold sales will take some time. First, the Executive Board has just endorsed the proposal to amend the Articles of Agreement to expand the IMF's investment authority. This amendment needs to be approved by the Board of Governors, and then make its way through national legislatures.
It looks as though a year is the shortest time for entry into force of an amendment of our Articles.
The gold sales will be phased to avoid the risk of disrupting markets. So we won't see the full effect immediately, but we estimate that 3 or 4 years from now, we should be back in the black.
As for the modalities of the gold sales, we will either sell to a central bank that is willing to buy gold, or sell in conjunction with the already established official gold sales program the Central Bank Gold Agreement.
We will coordinate with other official holders of gold to sell in such a way that we do not increase the overall amount of official gold sales into the market.
Naturally, the sales will be conducted within a strong framework for governance and controls, and with a high level of transparency. We are the world's third largest holder of gold, and we are keenly aware of our responsibility not to disrupt the Gold Market.
Which central banks could be interested? Russia perhaps? The implications of Kuhn's statements are riveting.
We know, for instance, that Russia has the intention of increasing its official gold reserves to 10% of its currency holdings. For the Bank of Russia to Buy Gold from the IMF would barely dent this ambition, requiring a full $50 billion in gold bullion to achieve it. The IMF gold sales will put only $12bn on offer at current Gold Market prices.
What's more, a direct deal between the BoR and the IMF would only show at a market related price, and it would not actually be seen by the open market at all. The impact such a straight party to party deal would have on Gold Prices would be the market's reaction to the subsequent announcement.
We also know that China too has a ridiculously low level of gold reserves barely 1% of its total foreign currency reserves of $1.7 trillion. So it is highly suspicious of going into the open market, because once even suspicions take hold, gold prices would rocket.
To date, this has limited the People's Bank of China to Buying Gold from their own, local gold mining production or more likely none at all. But with 400 tonnes on offer at one price, plus no impact on broader open market Gold Prices, perhaps the PBoC would jump at the opportunity?
There are several other Asian nations who might well be interested in buying a large tonnage of gold at a price in line with market prices, all at one go. With the US Dollar in such a decline and with no change in sight what better way to protect the nation's saving than to change a chunk of these holdings into gold?
The oil producers of the world, from the Middle East to Venezuela, might also find the offer extremely tempting, too. The very sight of such a large amount of gold on offer, handled in such a way as to not disrupt the open Gold Market, changes the prospect of Buying Gold fundamentally.
So we do believe that, if the IMF choose the direct sales route when they are ready to sell, they will do so quickly and painlessly and at market prices. The broader market's reaction to a central bank Buying Gold would be positive in the extreme!
It would confirm gold's value as a reserve asset in difficult times. Institutional investors as well as private citizens led by the high worth individuals who have already raised their allocation to physical Gold Bullion according to the GFMS consultancy's latest research would follow such a lead. This would attract a far greater volume as well as number of gold investors to the market, changing the tempo of Gold Investing considerably.
Many commentators believe that the IMF's reference to overall amount of official gold sales means the ceiling of 500 tonnes per year set by the Central Bank Gold Agreement, first signed by the major European central banks in the wake of the UK dumping 415 tonnes of gold on the market at the very bottom of its 20 year decline in 1999.
But that 500 tonnes per year quota is a limitation, rather than the expected overall official gold sales into the market . So it would take more clarification from the IMF for us to accept that they were referring to this ceiling absolutely.
For example, if the signatories have announced a total gold sales level of 1,730 tonnes at the beginning of the Central Gold Bank Agreement, and now have only, say, 400 tonnes left (which may well be close to the amount remaining at the end of Sept. this year, the end of the 4th of five years in this second CBGA agreement), then that is the extent of the planned official gold sales into the market . The IMF's official sales would have to replace this amount.
However, this reasoning may be at fault if there is still a year to go before these sales can take place? That would require a new Central Bank Gold Agreement for the IMF to work in conjunction with the already established sales program beginning most likely with the renewal of the CBGA in Sept. 2009.
But no such word is out there as far as we know. This leaves us still in the dark as to precisely what is to happen once/if the IMF gold sales are finally approved by the US Congress.
The most recent week, for example, saw NO GOLD SALES from the European central banks, but they did revalue their holdings at the end of the quarter and reported this change just this week. It is, however, the first time in the entire histories of both the Washington Agreement and the Central Bank Gold Agreement that we have seen no sales in a particular week!
It is difficult to draw any solid conclusions from this, but we remain riveted to the weekly ECB reports from now on, and perhaps link the IMF activities to this.
As for the likely effect on Gold Prices, for the entire report please visit www.GoldForecaster.com...
www.bullionvault.com one half of the highly respected team at GoldForecaster.com 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.
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