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September 25, 2009

The I.M.F. and Central Banks are Going to Support Gold!
by Julian D. W. Phillips

This is a snippet from a recent issue of the Gold Forecaster with Subscriber-only parts excluded.

As an almost revered subject, the question of whether central banks across the world will be buyers or sellers of gold is one usually left until after the event. Central Banks themselves are usually very unhappy to talk about their gold policy. When they do it is a once-in-several-years-event. As a result we watch the behavior patterns of the last decade to see what lies ahead.

First we look at the I.M.F and look at just how it will support gold.

The I.M.F. Gold Sales.

We have been waiting so long for clarity on the policy the I.M.F. are to adopt with the sale of their 403.63 tonnes of gold. The IMF Executive Board has now approved the sale of 403.3 metric tons. The head of the I.M.F., Strauss-Kahn said, "These sales will be conducted in a responsible and transparent manner that avoids disruption of the gold market. Most importantly, the sales are strictly limited to 403.3 metric tonnes, which is one-eighth of the fund's total holdings, so the IMF will continue to hold a relatively large amount of its assets in gold."

Prior to selling the gold on the market, the I.M.F. is prepared to sell the gold directly to central banks or other official sector holders. These sales to official sector holders will be conducted at market prices and would shift official gold holdings without changing total official gold holdings.

Any gold sales on the market would be phased over time, the I.M.F. said. Regular external reporting on gold sales will also be provided to assure markets that gold sales are being conducted in a responsible manner.

Let's be clear on this, if the I.M.F. are to offer this gold to other central banks before offering the gold to the 'open market' they are likely to receive bids that would certainly confirm that central banks [whether few or many is irrelevant] value gold in their reserves and are prepared to buy it in even at these prices! If all the 403 tonnes is sold this way, then that confirmation will elevate gold as a reserve asset and a measure of value.

If there is an amount left over, it will be sold in a manner that will not bring the price down brutally [avoids disruption of the gold market].

Which large $ surplus holding nations can afford this? Far more than just China or Russia! We expect the I.M.F. is already receiving offers from these central banks. So will any of this gold make it to the open market? What if only 100 tonnes are left for the market, what if none is left? Sales of this gold to any central bank will be positive for the gold price. Sales of all of it will bring a confidence to the gold price that will send it to new heights!

We believe that this statement from Strauss-Kahn, in itself is extremely positive for the gold price and will represent confirmation of gold's role in the monetary system.

The New Central Bank Gold Agreement.

Take a look at the Table above, on the tonnages of gold selling by the Central Bank Gold Agreement Signatories [in the latest Gold Forecaster - Subscribers only], over the last five years. With the final week of this Agreement on us, the future of European central bank selling becomes very clear to us.

As you can see, the original intention of the signatories to the Agreement was that they wanted to bring transparency to their gold sales, so as to make it clear to the world that they were not going to dump gold onto the market, a fear that had persisted for the previous 20 years prior to the "Washington Agreement". To that end, they announced the amounts they were going to sell in the future. It was not an announcement to sell an amount during the five years of the agreement, but an announcement of their total future sales, as you can see in the Table.

Some countries made no announcement and made unexpected sales. The E.C.B., Spain and Belgium were the only countries that did this. But Belgium has not sold any gold since 2006 and Spain has not sold since 2007.

However, it became clear that these were limited, with the exception of the E.C.B. who confirmed they had sold, after the event. They have sold each year of the Agreement. The question is, "will they sell under the new Agreement starting September 26th 2009" [next week].

More importantly, since Switzerland's announcement to sell an extra 150 tonnes, no announcements to sell have been made by any country that signed the Agreement. Take another look at this Table and you will see that the residual amounts still to be sold are very small and lie in the hands of countries that have not sold for the last three and two years respectively. Now add to that, that the number of signatories has increased substantially [with signatories who hold barely any gold anyway and with no announcements being made to sell from them] and you have a remarkable picture emerging. There appear to be no sellers among the signatories at all!

Yes, the agreement allows for up to 400 tonnes a year to be sold. But as we mentioned in an earlier essay, this 400 tonne limit allows for the I.M.F. to sell its 403 tonnes anyway it wishes under this agreement, in one shot, or over the period in dribs and drabs, whichever way they want to go. So this 400 tonnes is for the benefit not of the signatories, but for the I.M.F.!

But will they buy? Two points must be made here: -

The Agreement is an agreement to limit sales of gold and makes no reference to buying of gold.
The original purpose of selling the gold was in support of a newly launched currency, the €. Now it is well established there is no reason to sell more, particularly when one considers how against national interests past sales have been shown to be by a rising gold price.

With gold having risen nearly fourfold since the first European central bank gold agreement [the "Washington Agreement"] gold has proved itself as an invaluable reserve asset since the turn of the century. The problem is that the States and Europe are totally committed to paper currencies, with only a hidden and almost unrecognized backing of gold. Gold in this role is only designed for use in case of emergency [in extremis]. For the States or Europe to be seen to be buying gold would be seen as an admission of failure of the paper currency system. So while they will no longer be sellers of gold, we doubt they will be buyers in the next couple of years.

Their support of the gold price comes then from the termination of their sales, removing what was up to 400 tonnes supply from the market?

Russia

So will any central banks will be buyers? Russia has stated it wants to see 10% of its reserves in gold, but that is now several thousand tonnes of gold, just not available at anywhere near current prices. But they are on record as having bought in the 'open' market. They have bought up to 4 tonnes a month this year [9 tonnes in August] and from the end of last year. But they have made no announcement on whether they have been buying gold from local producers, before it reaches the open market. If they are buying locally, then the amount of 1 tonne a week they are buying in the open market must be in addition to this. We will have to wait until the evidence is before us before we can say they bought over 300 tonnes this year.

China

At one point China held only 300 tonnes in the gold and foreign exchange reserves. Then an announcement was made that they had doubled this to 600. Now this year they again announced that they had been buying gold at the rate of 91 tonnes a year since then. At the moment this reserve level is 1,054 tonnes. The Chinese way of accounting and buying allows for this to be hidden. This past week we heard from Mr. Cheng of the Chinese government who made this extraordinary comment to Mr. Ambrose Evans-Pritchard of the Daily Telegraph, "Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market," he said. Why is this extraordinary? Because China produces the most gold in the world and can also buy from local producers, without a ripple in the market place. Unless it buys in the 'open' market, China cannot 'stimulate the market' except in the longer term because of the reduction in supply. It certainly does not make sense to buy in the 'open' market without buying local production too. While it is an assumption, at the moment, it appears that China is buying at least 91 tonnes a year [as they reported] and with local production of over 270 tonnes, it looks like they are buying around 90 - 360 tonnes a year?

Will other central banks start to buy gold? We know that South Africa has stated that they are gold buyers, but not the amount. We believe that other central banks will become buyers, if they are in a surplus position to do so. We could not say when. If the $ does crash [$1.60+: €1] it is more than likely than many central banks will become buyers, but we will only know after the event.

But while Russia and China are buying, the pressure on other banks to buy gold is growing as the $ and other currencies become subject to difficult questions.

So we do believe that gold already is attractive to central banks. They will keep silent on this at all times because of the fear of "stimulating' the market. Nevertheless their actions and inactions are supporting if not raising the gold price!

The Impact on the Gold Price in price terms?
For Subscribers only!

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com.

Julian D. W. Phillips
Gold-Authentic Money

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price. FIND OUT MORE

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