IMF Board Approves Sale of 14.2 Million Ounces of Gold
By Jon A. Nones
08 Apr 2008 at 04:32 PM GMT-04:00
resourceinvestor.com
SEATTLE (ResourceInvestor.com) -- The Executive Board of the International Monetary Fund has endorsed a new package of measures to shore up finances, which includes the previously announced sale of more than 14.2 million ounces of gold, currently valued at over $13 billion. The Group of Seven has endorsed it; the U.S. Administration has endorsed it; the U.S. Congress has yet to endorse it.
Managing Director Dominique Strauss-Kahn said in a statement that the IMF had made "difficult but necessary choices" to set the IMF's finances on a sound long-term footing and end the institution's over-reliance on income from lending operations to finance its work.
The IMF's new income model would be based largely on generating funds from various sources rather than relying on lending, and includes $100 million of spending cuts over the next three years. The restructuring also includes broadening the IMF's investment authority to help it boost returns.
The fund has an annual deficit of about $400 million, spending $1 billion a year but only bringing in $600 million, while holding 3,217 tonnes (103.4 million ounces) of gold worth $95 billion at current prices - up from $23 billion just 5 years ago. The IMF is the world’s third largest holder of bullion behind the U.S. with 8,133.5 tonnes and Germany with 3,417.4 tonnes.
The new model "could generate an additional $300 million in income within a few years," the IMF said.
Tuesday’s announcement follows a recommendation in late January by an esteemed group of eminent persons, including former Fed Chairman Alan Greenspan and current President of the European Central Bank Claude Trichet, advocating on-the-market sales of 400 tonnes of gold by the IMF as means to finance ongoing costs.
In a report submitted to the IMF Executive Board today, the Committee, headed by Bank of International Settlement head Sir Andrew Crockett, concluded that the IMF's current income model, which relies heavily on the interest it earns from loans to member nations, is “no longer appropriate.”
At that time, the fund estimated gains about $6.6 billion in revenue with the sale of 400 tonnes at $500/oz. Investment of the proceeds would yield approximately $195 million per year, assuming a real rate of return of 3%, according to the committee. At $900/oz gold, revenue would increase to about $11.5 billion.
Any sales of the IMF's gold, however, must be approved by 85% of the organization's total voting power. Therefore, U.S. Congress must approve the IMF's proposal to sell gold, and the 185 member countries must approve the amendment, with most member countries required to enact legislation to expand the IMF's investment authority.
The United States, as the largest single member nation, and the largest single contributed of the IMF's gold, holds a crucial 17% of that 85% voting power and can effective veto the proposal. The U.S. previously blocked an attempt to sell IMF gold to the market formally in 1999 (see Joint Economic Committee Study) and informally 2005.
Mark O’Byrne, director at Gold Investments, said in a market note that approval by the U.S. Congress remains a significant stumbling block largely ignored in some of the coverage of the story.
“These rumours have been doing the rounds for many months and have failed to affect the market, and besides possible short-term sell offs, they will continue to have little impact on the gold market,” he added.
Even still, the G7 approved the sale of gold by the IMF in mid-February as part of its broad income reform. Then a few weeks later, the U.S. Treasury reportedly backed the proposal. Now rumours are circulating that the U.S. Congress may indeed clear the move.
Matthew Turner, metals analyst at VM Group, told RI that today’s announcement is another step forward, and “now the only real opposition can come from the U.S. Congress, and I suppose by agreeing, it’s got a kind of inevitability about it.”
The IMF committee made clear that it wanted the gold sales sold “in a transparent manner with strong safeguards” to avoid disrupting the market, much like gold sold consistent with the European Central Bank Gold Agreement, which limits sales to 500 tonnes per year.
IMF Finance Department Director Michael Kuhn recently told IMF Survey Online that the IMF would either sell the gold to a central bank that is willing to buy gold, or sell in conjunction with the already established official gold sales program - the Central Bank Gold Agreement.
“We will coordinate with other official holders of gold to sell in such a way that we do not increase the overall amount of official gold sales into the market. Naturally, the sales will be conducted within a strong framework for governance and controls, and with a high level of transparency. We are the world's third largest holder of gold, and we are keenly aware of our responsibility not to disrupt the gold market,” he said.
Turner said sales done within the Central Bank Gold Agreement is a real possibility since Trichet was on the committee that originally suggested the gold sales, and the ECB of which he is head oversees it.
European signatories within the agreement have reported sales of 136.7 tonnes in the fourth agreement year. Including sales from Switzerland and Sweden, not posted within the ECB’s reports, at about 12 tonnes per month on average, official gold sales are a little over 200 tonnes.
Only six months remain in the agreement year, with sales on pace to fall short of the 500-tonne quota. The CPM Gold Yearbook estimated CBGA gold sales to conclude at 400 tonnes this year. GFMS puts sales somewhere in the mid-400 tonnes, as does VM Group.
In March, Germany's Bundesbank indicated it will not sell any of its vast gold reserves in the next agreement year, the fifth agreement year beginning in September. Last year, Spain made up some of the slack, selling 165 tonnes, but indicated it would not sell any more large amounts in the near term. The most obvious candidate to make up the slack would be sales by the IMF.
Ross Norman, Joint Managing Director of FastMarkets Ltd., which operates TheBullionDesk.com, BaseMetals.com and MinorMetals.com, said the 400 tonnes would come in handy for the gold market.
“Given that the sales would happen over some years and within the CBGA this amount – if approved – would be readily absorbed by the investment and jewellery quarter,” he said.
Jon Nadler, senior analyst at Kitco Bullion Dealers, said in an e-mailed note that news of a possible U.S. approval of the IMF's plan was not playing too much of a direct role in the current decline of the gold price.
“Whether it will be mopped up by central banks or investment demand or find a home with fabricators is not known at this time. The sales are expected to be conducted in an orderly fashion and spread out over time,” he said.
Nadler said gold needs to retain its string of recent closes above $900 “as the first order of business.”
James Moore, analyst at TheBullionDesk.com, said the metal ran into some short-term pressure in early trading due to the speculation of IMF gold sales, but added that “despite the scale of metal that could potentially flow back into the market, given the scale of obstacles that need clearing before sales begin, traders are still of the view this is a case of buy the rumour, sell the fact.”
Moore said short-term gold still has to conquer trend-line resistance at $933 before testing back to the $950-$960 area.
Spot gold was last down $5.50 at $914.70 bid per ounce. Gold for June delivery fell $10.60 to $916.20 an ounce on the New York Mercantile Exchange. |
