Alan Greenspan and the IMF's gold

A customer of BullionVault asked for our thoughts on Friday...

ANY THOUGHTS on the findings of the EXPERT group including the great Greenspan, of their recommendation for the IMF to sell 400 tonnes of gold to put their finances on a more firm footing?

   Would appear to be a slight negative for the GOLD price.

  
Regards,
  
Philip

Our reply ran thus...

Dear Philip,
  
Many thanks for your email, it's an interesting point.

  
In fact, we were just preparing our thoughts on this week's proposal by a panel of worthies – including Alan Greenspan, former chairman of the US Federal Reserve – that the International Monetary Fund (IMF) should sell 400 tonnes of gold from its reserves to help balance its finances.

  
Here's our take...

  
We can't comment on the state of the IMF's finances, other than to note how it proves – once again – the absurdity of all government-mandated initiatives. Lacking the profit motive to direct its resources efficiently, the IMF slips ever further into the red every time one of its programs actually succeeds!

  
Help a member country settle their debts early, and the IMF loses out. If the program failed, and repayment were delayed, the IMF would miss its targets...but make more money!

  
As for the possible impact on the gold market, this week's mutterings certainly add fuel to the conspiracy theories surrounding central bank and government manipulation of the gold market. We're agnostic on the claims and counter-claims made here. But I'm personally minded to smile when gold breaks $650...and Greenspan et al immediately step up with a plan to match Gordon Brown's infamous sale of British gold reserves starting June 1999.

  
However, we're not overly concerned about the impact of any potential IMF sales on gold's bull market. Three reasons:

1). The IMF has sold gold before, but to no effect. Between 1976 and 1980 it unloaded 50 million ounces, about one third of its holdings. Average annual prices rose from $124 to $614 regardless. This week's proposal would be for nearer 12.9 million ounces.

  
What's more, the late '70s sale - as the IMF itself notes - came "after an agreement by its members to reduce the role of gold in the international monetary system." Come 1978, in fact, and amendments to its constitution "eliminated the use of gold as the common denominator of the post-World War II exchange rate system."

  
Anyone looking for evidence of a global cartel trying to consign gold to the dustbin of history will find it right there. Yet the price rose nearly 5 times over.

2). This week's announcement failed to dent either spot or futures prices. When Gordon Brown did similar front-running of Britain's 400-tonne sales in 1999, it knocked the price sharply lower. The difference is that gold was then in a bear market. Today its long-term direction is up.

Witness the effect of 9/11 on US and UK stock prices. The sharp drop ending Sept.21 quickly bounced higher. The long-term move was untouched however. Once stock prices were back on their trendline, they continued to tick lower in the bear market of 2000-03.

  
Or take the assassination of John F.Kennedy. Whatever your view of today's incumbent at the White House, the murder of America's most powerful man should be expected to hurt stock prices. But as Bob Prechter (of Conquer the Crash and Elliot Wave International) likes to point out, the Dow traded higher within 24 hours of the Dallas shooting.

  
Back then, the US stock market was in a long-term uptrend. Not even JFK's death could stop it. And 400 tonnes from the IMF is only two days turnover on the Comex in New York according to one report I read earlier today. It's nothing compared with the probable size of physical turnover via LBMA plus unreported trades.

3). Finally, the fundamentals haven't changed. If you liked gold Monday – as a hedge against inflation, complex financial wizardry, or simply as an asset in a clear long-term bull market – the IMF's possible gold sales shouldn't alter your position in my opinion.

  
Indeed, you might want to take the IMF panel's proposal as a contrarian signal. Michael Kosares, author of The ABCs of Gold Investing, noted yesterday that Zhou Xiaochuan – governor of the People's Bank of China – sat on the committee alongside Greenspan, Jean-Claude Trichet of the ECB, Andrew Crockett of J.P.Morgan, plus governors from the South African Reserve Bank, the Bank of Mexico and the Saudi Arabian Monetary Agency.

  
"There is no doubt in my mind that China would like to see the IMF sell ALL its 3,217 tonnes of gold," says Kosares, "particularly if China might become a primary recipient.

"Without any fanfare China would happily write the check..."

  
A little too cynical, perhaps! But a nice angle on what seems to us a non-event so far.

  
Yours sincerely,
Adrian

Adrian Ash
Head of Research
BullionVault.com

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Adrian Ash runs the research desk at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern and FT Deutschland; Italy's Il Sole 24 Ore, and many other respected finance publications.

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