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Heresy in the Church of Gold

By Jon Nadler       Printer Friendly Version Bookmark and Share
Apr 17 2009 9:27AM

Good Morning,

Gold prices underwent further erosion overnight, reaching lows near $845 per ounce, as they still appear on course for a visit to the $845 area - a neighborhood which stood as a beacon for a very long time after the previous mega-bull cycle of the late 70's/early 80's. Concurrent with the near 8% drop in bullion values over the past month, green (or should we say golden) shoots of hope emerged from India. At least, as regards gold imports.

Suddenly, but not surprisingly, the country's denizens turned India from a net exporter recently, to a 10 tonne net buyer for the month of April thus far. Coming ten days prior to one of the year's two most important gold-buying days, the price break was as welcome as the sun following a heavy monsoon. As we have always said, do not ignore the patterns seen in the world's largest gold-consuming country. You do so at your own risk - that is, if you obsess about price tags on your stash - present and future. Indians can proudly wear the lapel button that says "I am a value-conscious shopper." Not just as regards gold only, mind you.

New York spot market dealings opened with reduced losses this morning, but were still off by $1.50 an ounce -starting the week's final session at $872.80 as participants wrung hands not about the global crisis anymore, but about better-than-expected earnings among financial firms. Citi surprised analysts with a $1.6 billion net for Q1 of this year. Also on the minds of metals speculators, a little watch-item we have been drumming about, oh, since at least early 2008 let's say: deflation across the board. Silver continued to underwhelm, losing another 23 cents this morning, and quoted at $11.99 per ounce. Platinum rose $4 to $1207 while palladium fell $1 to $231 an ounce.

The dollar took a significant leap higher, rising to very near 86 on the index, while oil remained stuck in the gooey zone around $50 per barrel. It will still be crude's biggest weekly drop in two months, when the tally is completed. Reasons? Several - but slack demand, loss of inflation-hedge status (sound familiar?) and a strong dollar are the most identifiable ones. The greenback packed on the gains as the euro headed in the general direction of Tunisia, following a messy display of discord among ECB Council members (Greece versus Germany: not a soccer match, this.). And so it goes, on this mid-April Friday. A mixed bag of not very fresh nuts...ummm news.

And now, for something completely different. Really, really different. We had withheld the story until some confirmation was available, but here it is, in a half-a-coconut shell: India (!) and China (!) have proposed that the IMF sell all of its gold.

The Financial Chronicle (India) reports:

"India and China may press for the sale of the entire gold reserves of the International Monetary Fund (IMF) to raise money for the least developed countries. The IMF holds 103.4 million ounces (3,217 tonnes) of gold that, if sold, can fetch about $100 billion. A draft paper exchanged between New Delhi and Beijing proposes that the gold be sold in bullion markets over a period of two to three years. The money thus raised must be used in tackling poverty in the poorest nations.

“We have been discussing with China a common position on the subject,� a senior finance ministry official told Financial Chronicle. Both prime minister Manmohan Singh and Chinese president Hu Jintao will have to clear the proposal before the representatives of the two countries can take it up at the IMF spring meeting in June in Washington.

The G20 heads of state meeting in London earlier this month agreed to sell a part of the IMF gold to raise $6 billion for poor countries during 2009-11. This was a component of a $1.1 trillion package worked out by G20. The World Bank has estimated that over 90 million people may be pushed into poverty in the global economic turmoil.

“We are working on a more ambitious proposal of selling the entire gold off, as it is an idle asset with the IMF,� said the official. India and China are looking at three ways of using the money so raised. 1) The $100 billion be invested to improve IMF’s liquidity. 2) The money be committed to improving incomes of the poorest countries. 3) A mix of the first two options be considered.

How the sale will affect the bullion market, with attendant problems for currencies, has not been assessed. A large part of the gold may find its way into central banks and private players. Since most of its will be out of reach for retail markets, gold prices may not get hammered. Globally gold prices now are in the $870 - $950 per ounce range. India and Turkey, traditionally big buyers of gold, have not bought much lately because of low domestic demand. During January to March, India bought a paltry 1.2 tonnes. (Normally, India imports about 700 tonnes a year.) Turkey bought just 40 kg last month.

K Shivram, vice- president of the World Gold Council, said, “Whether the gold will be sold or not is an open question.� If the sale did take place it would be staggered, he said. There could be a temporary correction in gold prices but the market would bounce back. He added that when G20 announced the limited sale of gold, the prices that had been ruling around $950, dropped to $875. “But they are again moving up.�

In India, gold now quotes at Rs 14,500 to 15,000 per 10 gm. Karvy Comtrade, a commodity brokerage, expected the price to drift to Rs 13,000 [$775] by the end of June. He did see an impact of IMF gold sales in the short- to- medium term. Vibhu Ratandhara, assistant vice- president of Bonanza Commodity, said much depended on the US, which had 17 per cent equity in gold at the IMF.

The gold, if sold, would go mostly to central banks. He said there could be some impact on retail prices which might drop by Rs 400 per 10 gm. The IMF has built its gold reserves over 40 years. The historical value of the gold, as declared in its balance sheet, is $9.3 billion. Four major sources helped build the reserves. One, member- countries paid in gold their 25 per cent initial quota subscriptions. Two, interest charges on credit given by it were collected in gold from many countries. Three, member-countries can sell gold to it to fight a temporary liquidity crisis. And four, they can make loan repayments in gold."

Any bullion firm or newsletter vendor trying to put lipstick on this liquidation pig (or hide it altogether from your enquiring eyes) today, or next week, should do so with the implicit knowledge that they are avoiding a potential bombshell of an issue for the sake of more sales. The mere philosophical implications of the fact that two of the nations upon which many a gold bug laid their hopes for future price moonshots have now proposed such a cash-raising strategy, should have said vendors up at night. If one allows for a floor in gold values near $600 given the state of the world at present, then one must also allow for a cap at $xxx given what this news item's ramifications might be.

One thing is clear; we have long warned that the line of poor, and about-to-become-poorer, nations holding their outstretched hands at the IMF's doorstep, had wrapped around the block. The institution has not been faced with this kind of global panhandling in its entire history. How, or why, the body would consciously allow 100 million to fall into ruin around the world, is a rhetorical question not best addressed within the confines of this column.

If the proposal should come to fruition however, there is no way in which the sale - on, or off market, orderly or not, would not affect gold prices for a period of a few years. Think CBGA times two, per annum, for three-plus years. Think gold ETF times three-plus. And it took that puppy four years to amass 1K tonnes...

Perhaps, you are ready to posit that this is some kind of "ploy" by China and India to induce the IMF to let go of the bullion, so that they can then gobble up 3200 tonnes for their own central bank reserves at, say $600 per ounce, and that the actual scenario will be beneficial to the bullion market. Or, perhaps, you are ready to offer up the idea that sinister forces are trying to manipulate prices lower and are using two 'unwitting' countries to deliver the mission. The irony that such an idea was hatched by these two countries deserves a separate tome, somewhere.

"May you live in interesting times." Seems like we surely do, already. We did not expect this. But, then, nobody expected the...




Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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