- 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.
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- 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.
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- 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.
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- 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."
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- 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 JP Morgan 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.
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- 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."
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- 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."
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- 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.
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- 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.
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- 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:
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- "In the first instance, the amount should be limited
to the 400 tonnes I mentioned without envisaging any additional sales.
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- "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].
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- "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."
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- 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.
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- It is important to remember a couple of things here.
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- 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.
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- 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."
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- 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.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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.
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- 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."
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- 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.
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- 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."
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- Even if a sale does come about, will it matter?
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- 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.
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- 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.
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- 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.
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- 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.
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- 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."
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- 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 <http://www.kitcocasey.com/aboutDc.php>Doug
Casey, among others, now believe is imminent.
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- 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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- Doug Hornig is the senior editor for <http://www.caseyresearch.com>Casey
Research's Daily Resource feature, which appears daily on the KitcoCasey
and CaseyResearch.com web sites. Doug is the author of nine books whose
work has also appeared in Business Week, Playboy and more.
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