IMF sales don’t weigh down gold price

The price of gold held its own despite the dreaded approval of the International Monetary Fund’s (IMF) selling of some 400 tonnes of the yellow metal.

While the connection between the passing of a military supplemental bill in the U.S. Senate for wars in Afghanistan and Iraq might not appear to have a direct link to gold fundamentals, the bill was in fact crucial to the IMF’s gold selling policy.

And on June 18 the U.S. Senate passed the Military Supplemental Bill by a 91 to 5 margin, and as part of the bill, approved a US$5 billion injection into the International Monetary Fund.

That process cleared the IMF to sell the 403 tonnes of its gold holdings which it announced it would do at the G-20 summit in April. Revenues from the sale will flow to some of the world’s most impoverished countries.

In stumping for the bill, the Obama administration went to great lengths to get the message across that such help from the IMF would increase U.S. security due to the connection between poverty, hopelessness and ultimately violence against the U.S.

And while gold bugs may fear that the release of such inventory into the market will depress prices, the IMF has proposed to make the sale in a way that will cause the least amount of disruption.

To do it, the IMF will co-ordinate its sales with the Central Bank Gold Agreements (CBGA) — which limit central banks to selling of no more than 500 tonnes annually.

The agreements were set up in the late 1990s when central banks wanted to sell gold but didn’t want their sales to depress prices.

The one thing, however, to watch for, is whether or not the CBGA is renewed when it expires this September. Perhaps counter-intuitively the failure to renew the agreement may be good for gold as it would signal that there was enough central bank buying demand (mainly from China and Russia) to make limiting its sales redundant.

The removal of the CBGA could also encourage even more buying from central banks, which might otherwise fear holding an asset which they couldn’t sell freely.

Also encouraging for gold investors is the fact that the World Gold Council gave the IMF selling plan its thumbs up saying the sale would be done “in a manner that will have no impact on the smooth running of the international gold market.”