IMF Gold Sales: Does It Matter? - 11 February 2008
GOLD PRICES now sit at all-time record highs. Whereas the International Monetary Fund (IMF) finds itself short of $400 million per year.
Can you guess what comes next? "The IMF is rich if it wants to be," says Stephen Jen at Morgan Stanley, recommending IMF gold sales just before the idea was agreed by leaders of the world's top seven economies on Feb. 9th.
IMF gold – the third largest hoard after the US and German government gold reserves – is now worth around $92 billion, reports Reuters, tripling in value since the start of this decade.
And if you were spending $1 billion a year but only bringing in $600m, as the IMF is today, wouldn't you want to sell a little of your 3,217 tonnes in Gold Bullion?
IMF Gold Sales: A Flow of Income
It's the simple solution, agreed leaders of the G7 wealthy nations in Tokyo. But will IMF gold sales happen – and would it matter to the Gold Market anyway?
"The current Gold Price means a flow of income can be ensured," said the head of the IMF's steering committee, Italian finance minister Tommaso Padoa-Schioppa.
Meeting with his US, Japanese, German, British, French and Canadian colleagues for the last time at the end of last week (he has to stand down after losing his government post in Italy to the collapse of Romaro Prodi's administration), Padoa-Schioppa led discussion of "stability and growth in our economies", the fast-approaching US recession, stock market volatility, and the losses caused by reckless investments in US subprime mortgages – losses which German finance minister Peer Steinbrueck now reckons could total $450 billion.
And gold sales or not, the IMF certainly needs all the extra cash it can claw back right now, as well.
New managing director Dominique Strauss-Kahn wants to save $100 million per year by cutting 15% of his staff, mostly middle management according to The Economist. He'd like most of those 380 job-cuts to be voluntary – but it's actually the IMF which is starting to look redundant.
IMF Gold Sales: Why Now?
Founded at the end of World War II with donations of cash and gold from its member nations, the IMF works at "crisis prevention" – monitoring and hoping to avoid policy mistakes that could lead to big financial problems.
Using the $338 billion or so in cash that it holds (but never the gold, which exists as a ballast of "fundamental strength" in all official wealth reserves, as the IMF explains), the IMF also lends to countries facing balance of payments problems. This is where the IMF earns its keep, charging interest on these short-terms loans.
The IMF also makes loans to low-income countries implementing poverty reduction programs, currently helping 23 countries from Afghanistan to Sierra Leone. But more famously, the IMF offers advice and technical expertise to help developing economies stabilize their exchange rate and re-structure government finances to get out of crisis.
Since the Argentine crisis of 2001, however – blamed on the IMF's advised policies (and coincidental with the start of gold's bull market) – new IMF lending, the source of its income, has shrunk dramatically. The world's developing economies have simply developed too fast; they don't need so many hand-outs from the IMF.
Indeed, many former clients are now so busy piling up foreign exchange reserves from the United States, you have to wonder why the IMF doesn't ask for help instead. Or the US, for that matter.
The world's largest economy is now running a trade deficit worth 6.5% of its annual turnover (economists get nervous about any figure above 3%). The US government has run up $9 trillion in debt, and the US Dollar has dropped one-third of its value in the last five years to reach all-time record lows against the rest of the world's currencies.
IMF Gold Sales: The 1970s Bull Market
Would selling some IMF gold help push the Gold Price lower – and by extension, help the US Dollar to recover? It's been tried before, and with little success.
Between 1976 and 1980, the IMF sold gold in a bid "to reduce the role of gold in the international monetary system," selling one-third of its total gold holdings – a massive 1,600 tonnes.
Well over 60% of the world's current annual gold-mining production today, half of that IMF gold was dumped onto member nations at just $35 per ounce – the old "fixed" Gold Price up until the US Dollar was finally cut free of gold in 1971. Mid-way through the 1970s bull market in gold, that was less than one-third the abiding Gold Market price.
The other half of that IMF gold was sold via auction, but the auctions were so well subscribed, the impact on Gold Prices was actually to forced them higher and the auctions were eventually suspended.
Come April 1978, the Second Amendment to the IMF's Articles of Agreement finally eliminated Gold Bullion "as the common denominator of the post-World War II exchange rate system," as the IMF explains on its website.
"It also abolished the official price of gold and abrogated the obligatory use of gold in transactions between the IMF and its members. It furthermore required that the IMF, when dealing in gold, avoid managing its price or establishing a fixed price."
But trying to cut gold out of the world's monetary system did nothing to stem the flight of investment cash into Gold Investment. By the completion of those IMF gold sales in 1980, the Gold Price had risen more than five times over on the open market.
From the end of the fixed Gold Price in 1971, gold rose 24 times over by its high point of Jan. 1980.
IMF Gold Sales: Barriers & Impact
Fast forward to the gold bull market of this decade, and IMF gold sales have been repeatedly proposed and debated since the Gold Price turned higher in 2001. The last call came in Feb. 2007, when a panel of notable "worthies" recommended selling 400 tonnes of IMF gold to cover debt-relief in poorer nations.
That panel included former Fed chairman Alan Greenspan, infamous UK gold-seller Gordon Brown, Zhou Xiaochuan – governor of the People's Bank of China – plus Jean-Claude Trichet of the European Central Bank, Andrew Crockett of J.P.Morgan, and governors from the South African Reserve Bank, the Bank of Mexico and the Saudi Arabian Monetary Agency.
Their call for IMF gold sales came to naught however, while the Gold Price barely flickered when they announced their advice.
Twelve months later, the price of gold in Dollars, Euros, Pounds Sterling and most other major currencies has risen between one-third and one-half. So might this latest call for IMF gold sales actually come to something?
All seven members of the IMF's apparent boss – the G7 group of wealthy nations – agree the IMF should be allowed to decide for itself. But any sales of the IMF's gold must be approved by 85% of the organization's total voting power.
The United States, as the largest single member nation, holds a crucial 17% of that power – giving it an absolute veto over that 85% requirement. And the US, as the largest single member of the IMF, also contributed the largest single share of the IMF's gold.
Would Congress approve a sale of this "IMF gold" to help shore up IMF finances? The US blocked a previous attempt to sell IMF gold in 2005. And with an election now looming, albeit with Ron Paul firmly out of the running, the idea of selling "legacy gold" to cover a short-term funding gap might not appeal to US politicians amid the current debt-led recession.
IMF Gold Sales: The Revenge of Gold?
"Gold played a central role in the international monetary system until the collapse of the Bretton Woods system of fixed exchange rates in 1973," as the International Monetary Fund itself explains.
"Since then, the role of gold has been gradually reduced," the IMF claims. But that's only true for the official and government sectors. For many private individuals, Gold Investment has fast been regaining its monetary role ever since this bull market began in 2001.
Not gold as money that passes from hand to hand when you buy and sell. But gold as the perfect asset for meeting the second key requirement of money – a reliably rare and highly-prized asset that holds its value over time.
Any IMF gold sales in 2008 would at least avoid selling gold at the bottom, which is what Gordon Brown, then the UK chancellor, did in June 1999. His infamous 400-tonne sale knocked Gold Prices sharply lower when they were announced. But then, gold was in a bear market; it had been falling for nearly two decades.
Whereas any new IMF gold sales today would instead meet with a strong bid from anxious investors and private householders looking to defend their wealth.
If it sells gold now, the IMF looks very unlikely to dent Gold Prices. Indeed, "every time the IMF has sold gold it has actually triggered more buying interest," says Mario Innecco, a broker at MF Global in London, to Bloomberg.
"It will just make it easier for the big sovereign buyers" – the big central banks outside the G7 who want to build up their gold reserves – "to snap up cheap gold from the IMF."
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, Adrian Ash 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.