IMF sales – a perspective. The gold for sale is different from the rest!

It looks as though any sales by the IMF will be restricted to 400 tonnes used in a previous sale and repurchase agreement – and in any case would be made within the existing CBGA sales Agreement. The market is right to remain unfazed!

LONDON - 

The recent announcement from the US Treasury on 25^th February, approving in principle the proposal for the IMF to sell some of its gold reserves, marked a reversal of policy and generated a knee-jerk reaction in the gold market, with prices dropping by $10 to close at $938 that day.

The drop was short-lived, however. The fact that the major Exchange Traded Funds reported a combined increase in holdings of 12 tonnes on that day illustrates that the market was prepared, on sober reflection (although there is little in this market at the moment to suggest any notable periods of composed consideration), to absorb the news and concentrate more on the other forces that are driving prices higher, notably fears of stagflation, higher oil, a falling dollar and technical considerations.

Although gold is a deep market with reasonably ready mobilisation of stock when necessary, the potential retrenchment of workers at Gold fields and the announcement from AngloGold that it is looking for a 400,000 ounce shortfall in production this year will have helped to accelerate the subsequent move towards $960.

The proposal with respect to the IMF suggests sales of roughly 400 tonnes of metal, and to use the proceeds to set up an endowment that can be relied upon over a period of time without having to ask members for more funds each year. The IMF currently holds 3,216 tonnes of gold, currently worth (basis the morning fix on 27^th February of $958.75), just over $99.1 billion. Holdings have effectively been steady at this level since 1980, at the end of the IMF auctions that took place in the latter part of the 1980s, disposing of 1,555 tonnes under an international agreement designed to reduce the amount of gold in the international financial system.

In January 2007 the Eminent Persons Committee (chaired by Mr. Andrew Crockett and including Mohamed El-Erian, Alan Greenspan, Tito Mboweni, Guillermo Ortiz, Hamad Al-Sayari, Jean-Claude Trichet and Zhou Xiaochuan) reported the results of its study of the IMF's financial position. This recommended that the Fund should consider selling a portion of its gold with a view to offsetting, in part at least, projected future operating losses, which Mr. Strauss-Kahn has recently suggested could amount to $400 million per annum by 2010 if the rationalisation plan is not approved.

The announcement in early 2007 caused something of a stir in the market at the time, until the then Managing Director of the Fund, Mr. Rodrigo Rato, stated that any such sales would form part of existing or future (MineWeb italics) Central Bank Gold Agreements. Given that the existing Central Bank Gold Agreement does not conclude until September 26^th 2009 the implication was clear; i.e. that any such gold sales would not disrupt the market and would be extended over a period of time. The proposal was initially welcomed by a number of IMF Executive Board members, while Mr. Rato noted at the time that the G7 nations were open-minded about the possibility of sales.

It is important to note here that at the end of January this year, at a briefing on the Committee's Reports, Mr. Crockett stated that this 400 tonnes of gold corresponds to the gold that was sold and re-purchased in an off-market transaction in the early part of this decade and which is, for legal reasons, in a slightly different category for the rest of the Fund's gold.

This looks very much like the gold that was used in sale-and-repurchase transactions with the IMF in 1999 and 2000. In these transactions the IMF sold gold to Brazil and Mexico at prevailing market prices and then immediately accepted it back at the same price in settlement of financial obligations of those countries to the IMF. While the net effect on gold holdings was zero, the gold thus accepted was entered onto the IMF's books at the prevailing market price rather than the official price of SDR35/ounce. In accordance with the IMF Articles the equivalent of SDR35/ounce from the proceeds of the sales was retained in the General Resources Account. The increase in the value of the gold held on the balance sheet was deemed to offset the liabilities of Mexico and Brazil to the IMF.

At the meeting at the end of January Mr. Crockett endorsed Dr. Rato's earlier statements, commenting that "We have further proposed that that undertaking-sale of gold-should be qualified in important ways that limit its impact on the gold market. In the first instance, the amount should be limited to the 400 tons I mentioned, without envisaging any additional sales.

"Secondly, the sale should take place within the existing Central Bank Gold Agreement, that is to say it would not be additional to sales already programmed by central banks, but would be accommodated by reductions in the amounts of gold that the central banks might sell under the Central Bank Gold Agreement.

"And thirdly, we have emphasized that the sale should be undertaken in a very careful way in terms of their periodicity amounts and manner of sale such as not to disturb the market.

G7 Finance Ministers have accepted the proposal, and the US is considerably closer to approval than hitherto.

Back in November 2006, a US Treasury spokesman said that gold sales were not at that time "the appropriate option" for dealing with the IMF's funding, although the Treasury Secretary Henry Paulson said the following February that the US was still in "listening and studying mode". The United States is pivotal to any IMF gold sales proposal as an 85% majority is needed in order to pass the proposition and the US' voting power stands at 17.09% of total, giving the US a de facto veto.

The latest statement came from the Treasury's Under-Secretary for International Affairs, who noted that the Treasury supports limited gold sales because the Fund has a "very credible" plan for cost reduction that is in the process of implementation. This plan has proposed a 15% staff reduction and a reduction in the Fund's $922 billion dollar budget. Mr Crockett stated in his presentation at the end of January that at $500 gold, the income from such a disposal would generate income of approximately $6.6 billion dollars. This may look, in the current environment, to be an exceptionally conservative valuation, but this is a prudent approach, given that the average price of gold in 2007 was $695.39 and in 2006 was $603.77, substantially lower than the current spot price.

The markets are therefore right not to be worried about these sales. They will not disrupt the market and they will not be augmented by further sales. The US Administration appreciates that this proposal has to get through Congress, but a senior spokesman has suggested that soundings on The Hill have suggested that there will be some support. Now we await the course of the proposal through Washington.

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