Why IMF Gold Sales Won't Affect the Gold Market

As part of the G20 Communiqué the leaders called on the IMF to sell gold to support developing countries. While spot gold was considerably weaker on this news, an examination of the statement illustrates the market’s fears are unfounded. From the communiqué:

We have committed, consistent with the new income model, that additional
resources from agreed sales of IMF gold will be used, together with surplus
income, to provide $6 billion additional concessional and flexible finance
for the poorest countries over the next 2 to 3 years. We call on the IMF to
come forward with concrete proposals at the Spring Meetings;

The two keys to this statement are: (our emphasis)

1.“…Additional resources from agreed sales of IMF gold…” There will not be additional gold sales, the IMF will direct proceeds from previously agreed upon sales to developing countries.

2.“…To provide $6 billion…over the next 2 to 3 years…” These sales will likely be conducted through the London Bullion Market and will have little, if any, impact on the market. (Click to enlarge:)

As this table shows, $6 billion dollars in gold sales will have virtually no impact on the gold market. If needed, the IMF could sell all $6 billion in one day and still only be 28% of the average daily volume. However, the G20 calls on the IMF to make these sales over the next 2 to 3 years; these sales are a drop in the bucket for the gold market. Furthermore, a disorderly sale of gold by the IMF is unlikely due to its principles on how it treats the gold holdings.

IMF’s Governing Principles on Gold

•As an undervalued asset held by the IMF, gold provides fundamental strength to its balance sheet. Any mobilization of IMF gold should avoid weakening its overall financial position.
• The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies.
•The IMF has a systemic responsibility to avoid causing disruptions to the functioning of the gold market.
•Profits from any gold sales should be used whenever feasible to create an investment fund, of which only the income should be used.

Disclosure: I am long GLD and GDX

Comments

[SW Richmond:]

The greatest, coordinated global reflation effort in history has begun, sporting fiscal stimulus, monetary stimulus, and the most aggressive PR campaign ever undertaken. This is a game for all the marbles; it will determine whether or not central banking and command economies are publicly revealed as failures. No effort will be spared. We will see more of this; ultimately it won't matter.

Apr 03 08:48 AM

[Echo To All:]

your ignoring the psychological aspect to this. Traders do not want to see one of the largest holders of gold to sell. Tradeers will sell gold as news of this comes out. If one of the largest gold holders is selling... what does that tell you? (If u do not know who the sucker is when playing poker... its u)

gold broke its 6month uptrend yesterday via its SMAs, and could not breached its previous highs. A negative set up has formed. I don't know how low its going to go because qualitative fundamentals in this metal is difficult due to its speculative nature, but short-term things do not look good.

Apr 03 09:59 AM

[Larry House:]

I am not sure your evaluation of the words is correct, but I don't think IMF's intentions are a significant factor. I hope gold drops a little more, and it will be a good entry point. The more people think gold is dead and all problems are solved, the more I want to buy gold.

Apr 03 10:01 AM

[Darbyred:]

How much gold does the IMF physically possess or control?
I mistakenly thought the last big sale pretty much emptied IMF's coffers.

Apr 03 10:24 AM

[gmiller:]

Why do they have to SELL the gold, when they could just borrow or print more money, the way they ALWAYS do? Answer: It;s a shot across the bow of the gold people. They want to DEPRESS the gold price and discourage more investors and the public from buying any.

They have ben attempting such maneuvers since 1980, but gold has almost quadrupled since 2001 anyway. The best response to this is to buy and even take delivery of gold, at the temporarily depressed prices that might occur from this and other abortive intimidation methods. This is merely Larry Summers playbook in action.

Apr 03 11:08 AM

[GMiki1:]

They are intent on squashing gold, but it's crazy because actually they NEED to devlaue the dollar to discharge our debts and higher gold helps. Duh. Well, we don't want to disappoint China, now do we. At any rate, a bit of a drop and consolidation is good for gold. Less bullishness is a good launching pad for a leg higher up.

Apr 03 11:19 AM

[Brian Kelly:]

According to the IMF website they hold 103.4 million ounces

On Apr 03 10:24 AM Darbyred wrote:

> How much gold does the IMF physically possess or control?
> I mistakenly thought the last big sale pretty much emptied IMF's
> coffers.

Apr 03 11:22 AM

[12345:]

If they're trying to raise cass wouldn't it benefit them to keep their mouth shut and maintain a high POG?

This Gold will never hit the market, if it really is being sold it will be bought as soon as it's offered. It's just a distraction to keep the POG down while they print a few more Trillion.

If you get suckered out of your Gold then your statement rings true.


On Apr 03 09:59 AM Echo To All wrote:

> If one of the largest gold holders
> is selling... what does that tell you? (If u do not know who the
> sucker is when playing poker... its u)
>

Apr 03 12:40 PM

[Fighting Yoda:]

IMF will sell gold but likely not in the market. It would be directly selling to sovereigns like China, India, Russia – eager buyer. (There is something contractual/procedural about it).

However, author’s daily volume argument is misplaced. Volume does not matter – net sellers (or buyers) matter a lot more.

Apr 03 05:27 PM

[DiggerUK:]

This is a confused article.

The IMF has only sought agreement to sell the 12.97 million ounces it acquired after the 2nd Amendment of the IMF's Articles of Agreement.
No discussions have been reported on proposed sales other than this amount.

At today's price a sum of about $11.5 billion plus.
www.lbma.org.uk/statis...
www.imf.org/External/N...

Apr 03 06:57 PM

[sorgmot:]

Gold is gold.

You can not make it appear or disappear by a government order.

Governors and their economist employees endlessly demonstrate their stupidity and make those they govern suffer.

The problem is that governors and their economists and other employees bought trunk loads of worthless paper assets. Now, the money paid for those worthless assets has vanished. That makes the remaining money rise in value relative to hard assets and that in turn makes existing wages worth more. Gold is money and thus rises in value too as against most assets.

In the USA in 2009, the real value of the US $ is rising in term of things it can buy like goods and non government services. But, alas, real taxes are rising even faster. Yes, government borrowings are exploding and they are taxes too.

The proper solution is to cut government employment and all forms of government burdens including taxation, regulation too..
Only these changes can raise the living standard of the population.

Good luck.

Apr 04 11:23 AM