IMF Gold Sales
February 04, 2005
The gold price has been weak of late, down ten dollars
in the past seven days. Thursday’s decline was blamed on remarks
made by the British Chancellor of the Exchequer, Gordon Brown, about
a possible revaluation of the International Monetary Fund’s
gold reserves, and the possibility that some of those reserves might
be sold to provide debt relief to poor countries.
The IMF has about one hundred million ounces of gold
which are valued on its books at between $40 and $50 an ounce. To
keep the arithmetic simple, let’s say the IMF has one hundred
million ounces valued at $40 an ounce. Revaluing that gold at $440
an ounce would instantaneously create $40 billion dollars on the
IMF’s balance sheet.
The $40 billion dollars so “created” can
then be used to offset some of the debt owed to the IMF by poor
nations. Such a revaluation and cancellation of debt does not necessarily
involve the sale of any gold -- it can be done with accounting entries.
Another possibility is that the IMF actually sells
some, or all of its gold, and uses the proceeds to assist poor countries
with their debt. If the IMF sold its gold it could, for instance,
buy a basket of sovereign debt and use the interest earned on the
portfolio for debt relief. This option could potentially be more
detrimental to the gold market. We are talking about a lot of gold:
the IMF has 103.4 million ounces, or 3,216 tonnes. If all that gold
were dumped on the market at once it could have a negative impact
on the gold price. However, it is highly unlikely that the IMF would
do that.
It is far more likely that the IMF will use off-market
transactions to assist poor countries with high debt burdens, as
it did with Brazil and Mexico a few years ago when these countries’
debt payments to the IMF were coming due. Between December 1999
and April 2000 the IMF “sold” 12.9 million ounces of
gold to Brazil and Mexico at prevailing market prices and the profit
on the sales (market price for gold less approximately $40 an ounce)
was placed in special accounts designated for debt relief. Brazil
and Mexico then immediately sold the same gold back to the IMF,
at the same price they paid for it, to settle their debt payments
that were coming due. The net effect was that the IMF still had
exactly the same amount of gold on its books. It’s not clear
from the IMF’s website how, exactly, Mexico and Brazil’s
overall debts were impacted. I assume that their debts were just
re-financed in the process, although some of the money created on
the IMF’s balance sheet by this revaluation of its gold reserves
could have been used to offset the total amount of outstanding debt
as well. It is clear, however, that the money created from the revaluation
of the IMF’s gold is being used to provide debt relief to
poor, and heavily indebted countries.
Such off-market transactions are similar to a pure
revaluation of the IMF’s gold and do not involve any gold
actually being sold on the market. Since many of the same poor countries
that the IMF is trying to help are actually gold producers, and
since in many cases these countries’ gold exports account
for a large (sometimes very large) percentage of their foreign currency
receipts, off-market transactions are far more palatable than actual
gold sales.
If we assume that some of the IMF’s gold will
hit the market, then we have to consider what impact that will have.
For instance, if the IMF sells its gold over a period of five to
ten years, the net impact on the gold price should be negligible.
In a previous commentary (“Central Bank sales and the gold
price”, December 5, 2003) I showed that Central Bank gold
sales did not affect the gold price during the period from 1990
to 2003. During that time Central Banks sold roughly 5,500 tonnes
of gold -- far more than the IMF has to sell -- and since that did
not negatively impact the gold market, I have no reason to believe
that IMF gold sales will negatively impact the market either.
The only impact that Central Bank sales did have on
the gold market during the 1990s was that they caused speculative
selling on the date of the announcement. But the announcements were
all made in arrears and the gold price always recovered within a
few weeks of the announcements. In other words, the actual Central
Bank sales, themselves, did not affect the market. That is also
exactly what we saw on Thursday: a comment by the British Chancellor
of the Exchequer caused a speculative sell-off in gold -- without
an ounce of IMF gold being sold. I expect the gold price will recover
within a few weeks, unless something else, like a rally in the US
dollar, occurs.
Another thing to keep in mind is that the G7 is split
over how to deal with the debt of poor countries. To revalue or
sell the IMF’s gold will require an 85 percent majority vote.
The United States alone has a 17 percent vote, and could therefore
block the IMF from selling its gold.
Given that the IMF needs an 85 percent majority to
sell its gold, that actual gold sales would hurt the same countries
(gold producers) the IMF is trying to help, and that more benign
off-market transactions are also a way to help those countries,
I doubt that we are going to see massive IMF gold liquidations in
the near future.
What we are likely to see is a replay of the 1990s
when Central Bank gold sales were attracting a lot of attention
and were blamed for the decline in the gold price while, in fact,
the gold price was merely mirroring the US dollar.
With the dollar now declining the gold price (in US
dollars) will continue its upward trend and nervousness about IMF
gold sales is likely to cause counter-trend corrections, which should
turn out to be good buying opportunities.
So I am not worried about this week’s
decline in the gold price.
Paul van Eeden
Paul van Eeden works primarily to find investments for his
own portfolio and shares his investment ideas with subscribers to his weekly
investment publication. For more information please visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
Disclaimer
This letter/article is not intended to meet your specific individual investment
needs and it is not tailored to your personal financial situation. Nothing contained
herein constitutes, is intended, or deemed to be -- either implied or otherwise
-- investment advice. This letter/article reflects the personal views and opinions
of Paul van Eeden and that is all it purports to be. While the information herein
is believed to be accurate and reliable it is not guaranteed or implied to be
so. The information herein may not be complete or correct; it is provided in
good faith but without any legal responsibility or obligation to provide future
updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility,
or assumes any liability, whatsoever, for any direct, indirect or consequential
loss arising from the use of the information in this letter/article. The information
contained herein is subject to change without notice, may become outdated and
will not be updated. Paul van Eeden, entities that he controls, family, friends,
employees, associates, and others may have positions in securities mentioned,
or discussed, in this letter/article. While every attempt is made to avoid conflicts
of interest, such conflicts do arise from time to time. Whenever a conflict
of interest arises, every attempt is made to resolve such conflict in the best
possible interest of all parties, but you should not assume that your interest
would be placed ahead of anyone else’s interest in the event of a conflict
of interest. No part of this letter/article may be reproduced, copied, emailed,
faxed, or distributed (in any form) without the express written permission of
Paul van Eeden. Everything contained herein is subject to international copyright
protection.
|
Printer Friendly