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As you all know Bangladesh bought 10 tonnes of the gold on sale from the I.M.F. last week. This leaves 88.3 tonnes
to sell now. The 10 tonnes that
Bangladesh bought cost them around $1,260 an ounce. This tells us
that price was not a determinant in the matter. This may surprise many,
but it does highlight something about why central banks in general are buying
gold now.
The potential, not just for currency crises, but serious foreign
exchange structural problems is huge. The international level of
cooperation between nations is poor [as we are seeing in the U.S. China
faceoff over the Yuan exchange rate against the Dollar] leaving us uncertain
at the prospect of unstable currency markets. This has vastly
increased the attraction of gold as a reserve asset. As such the
price paid for gold in foreign exchange reserves is hardly
relevant. When that dark and rainy day comes its use in settling
pressing foreign obligations will heavily outweigh what the gold
cost. It’s having the gold to pay these obligations or
guarantee foreign currency obligations that will matter then.
Why can’t anybody buy anyway?
The I.M.F. has chosen to sell their gold in only two ways;
1. They will
sell direct to central banks and announce the sale after the sale is
complete.
2. It will sell the
remaining gold on the open market through the bullion banks over time in a
manner that will not influence the price. This can result in just
a couple of tonnes sold right up to 15+ tonnes sold in any month.
China not a Buyer but others would like to.
You may be surprised that China has not made a direct bid for the gold
on sale from the I.M.F., but there are good reasons why they have not
bid. The Chinese central bank, the People’s Bank of China
does not buy gold for its reserves direct from any market or
auction. It uses an agency to do the buying. This
agency can hold the gold for 5 years and then pass it to the P. of C.
Only at that point does the central bank declare it has bought
it. This anonymity is very important to China. If it
were known that China had a serious long-term commitment to buying gold there
is no doubt that it would precipitate such a jump in the gold price that the
market could destabilize and China not be able to access open market gold.
Because of these considerations of a direct and then announced
approach by China to the I.M.F. we doubt very much if China will now be a
buyer. They will continue to buy in the open market anonymously.
If the I.M.F. had been willing to sell direct to large institutions
[such as China’s buying Agency if they had been a buyer] the gold would
have been sold to it and/or to other private funds and sovereign wealth funds
very quickly after the initial announcement to sell gold had been made by the
I.M.F. In fact, there are many non-central bank institutions that
want to approach the I.M.F. to buy the gold, but the two selling routes are
inviolate. This means that, with only 88.3 tonnes
left to sell it the opportunity to buy gold in a large amount [only by
central banks] is slowly disappearing.
A potential buyer could have been India, who made the largest purchase
of I.M.F. gold at 200 tonnes.
Just after India bought the 200 tonnes of gold from
the I.M.F. it stated that it may be a further buyer of this gold.
Will they come in again, or will more Asian central banks come in for the
first or second time? Well, both time and supply are running out for
all central banks buyers.
As the buying has come from Asian countries who
know and love gold, the most likely buyers will be from that part of the
world, not from the developed world’s central banks. For
the West to be buyers, may well be seen as undermining the paper currency
world.
At the present rate of selling in the ‘open’ market the
I.M.F. will have completed selling in 6 months time. So the clock
is ticking. That’s why we expect one or more announcements
from the I.M.F. on further sales to central banks soon. These
will come anytime from now and over the next 6 months. We would
not be surprised is the entire remaining amount goes in one fell swoop,
soon. No-one can say who for sure will be buyers.
The IM.F.s’ announcement that I.M.F. gold sales are complete
will be a trumpet signal to the market that supplies have
narrowed. Then what?
Julian D. W. Phillips
Gold/Silver Forecaster – Global Watch
GoldForecaster.com
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