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As illustrated above,
British Prime Minister Gordon Brown's serial attempts to persuade the
International Monetary Fund to sell gold have proven to be one of the more
reliable indicators of an impending price spike. Over the past decade, Brown
has begged, pleaded and otherwise cajoled the IMF no less than four times to
sell from its 3217 tonne hoard. Each of the first three attempts were stymied
for one reason or another (mostly having to do with reluctance on the part of
the U.S. Congress) and each was the harbinger of a major price rally. Brown's
fourth and latest attempt to pry metal out of the IMF came during the early
April meeting of G-20 in London.
The accompanying
chart was last published in April, 2007 just after Brown's third appeal to
the IMF and just before the historic price run-up that took gold over the
$1000 mark. His initial appeal in 1999 came just prior to the first leg of
gold's present bull market which took gold from $280 to $450 -- a 60% gain. The
second came just prior to the 2005-2007 price run-up which took gold from
$425 to the $650 level -- a gain of more than 50%. The current plan, awaiting
U.S. Congressional approval, is for the IMF to sell a 403 tonne tranche
involved in credit repayments between 1999 and 2000.
This time around the
prime minister's foray into the gold market has run into some unexpected
turbulence. China and India, according to a Bloomberg report last week, has
requested that the IMF sell the entirety of its reserve, that is, all 3217
tonnes. Given the dire circumstances within the present monetary order, it is
not difficult to understand why. Growing official sector gold demand has been
one of the more interesting side bars to the current economic crisis. China and India, it seems, have just upped the ante. If potential IMF sales bring to the surface a
growing desire by central banks and nation states to acquire gold and in
significant amounts, we may be in a whole new ball game -- one that could
add to the already notable verticality of the last two legs of the bull
market. The Gordon Brown Gold Rally Indicator might once again prove its
reliability in 2009, but if so, it could be for reasons that carry much
deeper implications for the gold market and world monetary order in the
months to come.
The politics of gold
Often lost in the
debate about IMF sales is the fact that the founding states, which originally
contributed the bulk of the IMF gold reserve, would be out this physical
metal should it be liquidated. The IMF gold is not some amorphous, orphaned
hoard lacking claims of ownership. It is in fact an important entry on the
balance sheets of the nation states which contributed it, and those
contributors include, among others, the United States and several of the
larger European states. This leads to some interesting complications in the
international politics of gold.
When you take into
account that by IMF rules the contributing states still hold the right to
restitution at the contributing price, which is currently around $52 per
ounce, one wonders how much incentive truly exists for sales of ANY size let
alone the reserve in its entirety as China and India have suggested. The
European states, for example, might question why their portion of the IMF
gold reserve should be utilized to satisfy the trade imbalance problems of
the United States (which is what China and India are in fact suggesting) --
particularly at these prices and even if the sale is a comparatively modest
403 tonnes.
Perhaps that is the
rationale behind the IMF and Gordon Brown concentrating on the 403 tonne
tranche involved in credit repayments in 1999-2000. The IMF claims that this
gold is not subject to the restitution clause and thus not available to
members. There was a time when such a rationale might go unchallenged, but
these are unusual times and unusual circumstances. In the 1970s, under
economic circumstances similar to today's, IMF members compromised on the
restitution issue. Over 1500 tonnes of gold were earmarked for sale, but half
went to members under the restitution clause and the other half was
auctioned.
If the gold standard
is to be reinstituted, and the appeal by China and India has the taste and
feel, at least in a de facto sense, of a return to using gold as a final
means of payment, it will have to be applied fairly and universally. No state
should curry favor or somehow nudge their way to the front of the line. In
addition, as recently suggested in an article on the gold standard by the Financial Times' Gillian
Tett, the price would have to be multiples the current price in order to
truly deal with the problem of international dollar imbalances. In the end,
all the talk about IMF gold sales might be the catalyst to discovering what
really needs to be done to solve the festering monetary problem which has
been loosed on the world economy by the present economic crisis.
Final Note: The link below will
take you to much-needed question and answer session assembled by the
International Monetary Fund on the subject of its gold sales. A study of this
page and its subsidiary links will lead to a better understanding of the
issue, i.e., what is and isn't possible under the present circumstances.
Michael J. Kosares
USAGold - Centennial Precious Metals, Inc.
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