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As you have probably heard by now, a blue-ribbon
panel recently advised the IMF to sell gold as a way of trying to clean up
its finances.
The news initially spooked some weaker holders and
hedge fund managers, most of whom are clueless about the overarching trends
driving gold. However, as Doug Hornig makes clear
in the following report, the proposed IMF sales represent much ado about
nothing… other than perhaps creating a buying opportunity, that is.
Doug Casey
The International Speculator
About Those Proposed IMF Gold Sales
A Daily Resource Special Report
By Doug Hornig
Lately the
metals markets have been abuzz with speculation about the meaning, and implications,
of proposed gold sales by the International Monetary Fund (IMF). It’s a
subject about which many of our readers are probably concerned, so we decided
to take a look.
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. We the
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, our readers are apt to be most interested in 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.
Doug Hornig
www.caseyresearch.com
 
Doug
Hornig is a senior editor for Casey Research,
publishers of Doug Casey’s International
Speculator… for over 27 years
providing investors with unbiased and carefully researched recommendations
for high-quality gold and other natural resource stocks with the very real
opportunity for a 100% or better gain within a 12-month horizon. Hornig also writes the Daily Resource, a daily column
that appears on the KitcoCasey and
CaseyResearch.com web sites.
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