Why the IMF's Indian Gold Sale Matters

By David Parkinson

Why should we care about the IMF selling a truckload of gold to India?

Well, to start, because the gold market clearly cares deeply.

Bullion surged more than $30 (U.S.) to $1,085 an ounce in New York Tuesday, trouncing is record high set just three weeks ago, after the IMF disclosed that it had sold 200 tonnes of gold to the Reserve Bank of India - for the low, low price of just $6.7 billion. The sales took place over the past two weeks, and represent almost half of the IMF's previously announced 403.3-tonne gold sales program.

It's easy to see how this is good news for the IMF, which sold at the top of the market to raise much-needed funds to get its finances on a more solid footing, after financial-crisis-related bailouts had drained its coffers. India seems pretty happy, too, converting some of its ample foreign-currency reserves into a rock-solid asset and better diversifying its central-bank holdings.

But why should shuffling gold from, essentially, one central bank to another be such a big deal to the open market?

Precisely because this gold never hit that open market, and never will.

The prospect of the IMF and other gold-rich central banks selling off gold reserves to the open market was one of the few factors out there weighing gold prices down. Ever since the IMF decided to start selling gold, market watchers had been bracing for a possible flood of gold supply that would take the wind out of gold's sails.

The fact that the IMF sold fully half of its gold program to a single buyer, off-market, in one fell swoop just six weeks after approving the sales program, caught the gold market by surprise.

"I always thought that some of it would be sold off-market, but it was a bit of a surprise that as much as 200 tonnes had been sold off-market," Bank of Nova Scotia director of precious metals sales Simon Weeks told Reuters.

Now, suddenly, the market is considering the very real prospect that the rest of the IMF sales program could end up with central banks, and little, if any, will ever hit the streets.

"We suspect it may be [bought by] China, other Asian countries, Russia or even India again, as they hold relatively little gold relative to their very large [foreign currency] reserves, and may want to diversify away from U.S. dollars," wrote Bart Melek, global commodity specialist at BMO Nesbitt Burns, in a research note.

China, in particular, is rumoured to be eager to snap up the rest of IMF's gold, as it looks to diversify its own massive foreign reserves - an uncomfortably large amount of which is tied to the sinking U.S. dollar.

This would keep a whole lot of gold out of the market, and that's what got traders excited Tuesday. Yet Mr. Melek points out that such an event would essentially be "somewhat neutral from a supply/demand perspective" - since the sales would also remove open-market demand for gold from the central banks that are able to buy from the IMF instead.

Still, the fact is that the RBI looked at $1,000-an-ounce gold and was still willing to buy an awful lot of gold at that elevated price. Aside from supply/demand balances, that told gold traders that some pretty big customers are still hungry for gold at current price levels, and that there are ready buyers to snap up central-bank supplies.

That might be enough to fuel another full-fledged bull run for gold, but it certainly removes some big questions that were overhanging the market.

Comments

[Alex Filonov:]

Problem is, open market is, essentially, a paper market. Price of gold for at least couple of years doesn't depend on physical gold movement, it depends on supply and demand of future contracts.

Nov 03 06:29 PM

[ilc:]

It could set off a polite/undeclared bidding war among central banks. If I were China, I'd be pissed that India beat me to the IMF gold and now I (China) have to pay $30/oz more when it's my turn with the IMF. And if I were the other emerging market / dollar-heavy central banks, I'd look at India and China trying to expand their gold holding and think, gee, I gotta get in on that.

Nov 03 06:33 PM

[DiggerUK:]

Seeking Alpha is trotting out articles on the IMF sale to India at a rate of knots, all of them failing to answer one question.
By what process was it decided that India gets 200 tonnes?
Dying to know the answer to that one.
(Hillary Clinton been sticking her oar in round the back somewhere ? Who knows.)

"I always thought that some of it would be sold off-market, but it was a bit of a surprise that as much as 200 tons had been sold off-market," Bank of Nova Scotia director of precious metals sales Simon Weeks told Reuters.
And this is someone who works for a bank that does the London Gold Fix twice a day.
www.lbma.org.uk/assocn...

Place your bets on who gets the rest.
Japan? Brazil? Mexico? Saudi? Australia? Iceland?

Nov 03 06:49 PM

[The Geoffster:]

This is an outrage. Exporting countries are supposed to buy Treasuries with their excess dollars. Haven't they heard that gold is a useless relic- it doesn't pay dividends, you can't eat it, and all that. It makes you think they don't have faith in the dollar. There not on to something are they?

Nov 03 07:36 PM

[Mad Hedge F...:]

wsc ) News broke this morning that, out of the blue, the Reserve Bank of India bought 200 metric tonnes of gold from the IMF for a handy $6.8 billion. The news set the gold market on fire, boosting the December futures to an all time high of $1,088. It is the largest transaction in the barbaric relic since the Alaric’s Visigoths sacked Rome in 410 AD. It has been public knowledge for some time that the IMF was looking to unload 403 tonnes of the yellow metal in order to fund lending to poor countries. Many traders say this threatening overhang is why gold failed to definitively break out to the upside this year, despite six attempts. The expectation was that China would take this hoard as part of a broader diversification away from the dollar. Bringing India into the fray, which had no history of stockpiling gold, is a whole new kettle of fish. Not only does this raise the prospect of a bidding war with China for more gold reserves, other cash rich emerging market central banks are likely to join the fray as well, no doubt panicked by the ominously rising whirr of printing presses in the developed countries. My short term goal for gold was $1,200, but I now have to raise that to the $1,300 favored by some chartists in view of the new dynamics. If you want to see my long term target, take a look at the chart below, which has gold zeroing in on its inflation adjusted all time high of $2,358.

Nov 03 07:45 PM

[Roger Knights:]

Gold won't dip below $1000, because China or some other Asian central bank will buy on dips. The mode of the music has changed.

From here on out there will be increasingly high implicit support zones for gold. There won't be big money made on the short side. Being long is farily riskless—at least below 1100.

Typo--there should be a "not" in:
"That might be enough to fuel another full-fledged bull run for gold, but ..."

Nov 03 09:38 PM

[Jasper M:]

". . . this gold never hit that open market, AND NEVER WILL."
(emphasis added)
OH, WHat an assumption!

The IMF sold because it Had to. But the author seems to assume that 'everything is alright now' in IMF land, that the bailouts that drained its coffers are over.
Nothing could be further from the truth.

This sale IS a big deal, because it is The Wave of the Future: gold in weak hands, being sold to raise cash.
1) The IMF's 'heavy lifting' to shore up failing national finances is Just Getting Started,
2) Russia has fiscal (and possibly military) ambitions based on an Oil price it will never see again,
3) and China, well, China is making every mistake they can, as fast as they can. When they lose the export chunk of their economy (ONLY 20%, we are now assured), all those piles of commodities they have acquired will be of little use.

All these payers have terrible track records for smart moves, and they will be selling big chunks of their hoarded yellow within a few years, just for operating capital.

And don't suppose those hedge funds and ETFs known to be stockpiling will help stabilize the situation. The hedge funds are leveraged, and so any that are already loaded up must necessarily dump for margin calls. And the ETFs must sell on the whims of their share holders.

Nov 03 09:40 PM

[MarvinMBA:]

Silver is going to make the next major move. Buy SLV, INTC and GE for long term gains...MarvinMBA

Nov 04 12:25 AM

[The Goldfinger:]

So true. Russia is a falling state with now a lot of debt and counting, again. They need the price of oil to be way above 70$ just to keep the budget off of deficit. -12% GDP, worst economic numbers since early 90s, and almost no $$ left in the Stabilization Fund they acquired during the times of oil highs. I would not be surprised if they start selling gold in a few month, if they have not started doing it already. And I even know what Asian state is going to buy it... ;-)


On Nov 03 09:40 PM Jasper M wrote:


> 2) Russia has fiscal (and possibly military) ambitions based on an
> Oil price it will never see again,

Nov 04 12:40 AM

[JeffDB:]

On Nov 03 09:40 PM Jasper M wrote:

> ". . . The IMF sold because it Had to. But the author seems to assume that 'everything is alright now' in IMF land, that the bailouts that drained its coffers are over.
Nothing could be further from the truth.

> This sale IS a big deal, because it is The Wave of the Future: gold in weak hands, being sold to raise cash.
1) The IMF's 'heavy lifting' to shore up failing national finances is Just Getting Started, ... >
-------

On the other hand, India isn't necessarily such a "weak hand", and China and other emerging markets appear to be in better shape than the U.S. in the eyes of many economists and investors around the world.

Dollars seem to be in a lot greater supply than gold at the moment, and it appears that the supply of those dollars is likely to continue increasing at a much more rapid pace than the supply of gold given our massive debt, massive deficit and the first wave of the baby boomer generation just ready to hit retirement age and begin drawing out of the "Social Security Trust Fund" which is loaded up with U.S. Treasuries, rather than pumping money into it.

The IMF may be over a barrel, but other central banks are making a cool calculation that are swimming in hundreds of billions of dollars in their reserves, that perhaps diversifying a little into gold reserves might be a prudent move.

Can't say that I blame them.

Nov 04 12:56 AM

[Jasper M:]

JeffDB:
I grant that Indja is not the weakest hand. But they, too will do some selling before this is over.

As to the dollar supply, that is almost all credit at this point, and can vanish in the course of a lazy afternoon. And probably will: See von Mises for the inevitable fate of credit inflations.

I would argue that, in a deflation, China will fare far worse than the US, as (ONLY, we are now assure) 20% of its economy is export. When that Goes Away, they will Never hit the growth targets they think They need to prevent unrest (8%, last time I checked), and it'll be back to the 'good old days' for China.
Put another way - when we have a depression, we get Roosevelt. When China has a depression, they get Mao.
Different this time? I SURE hope so. But hope is not a strategy.

Nov 04 01:53 AM

[Screwloose:]

"The IMF had to sell?" This is an organisation with an unlimited power to print money - and they just have; $250 billion in crisp new SDRs.

$6B from India is nice - but it's pocket-change. Earmarked for admin costs and good [read hopeless] causes.

As to the sales process: after approval, all or any of the gold was immediately available for off-market sale to the highest bidder - so far that's been India - or, if no bids, to be trickled into the market.
Where's the mystery in that?

Nov 04 01:27 PM

[Jasper M:]

On Nov 04 01:27 PM Screwloose wrote:

> "The IMF had to sell?" This is an organisation with an unlimited
> power to print money -

Exactly - MONEY, Not value.
It is this very ease of creation of fiat currencies that will drive their addicts to sell their real assets, to try to defend the value of their fake product.

Nov 04 01:42 PM

[JeffDB:]

Thanks for the reply:

On Nov 04 01:53 AM Jasper M wrote:

> As to the dollar supply, that is almost all credit at this point,
> and can vanish in the course of a lazy afternoon. And probably will:
> See von Mises for the inevitable fate of credit inflations.

I'd be interested in looking at a paper or chapter to a relevant article if you have one. I've read just a little so far on the Austrian School but would like to learn more. A search of the von Mises site for "credit inflation" turned up some 10 pages worth of articles, however and a quick scan didn't reveal anything that would shed additional light on it for me: search.mises.org/searc...

But as I understand things now it doesn't seem as if the Fed would allow hundreds of billions of credit dollars to vanish in smoke over the course of a lazy afternoon even though that is, of course, theoretically possible. It would just be too devastating for the economy for them to allow it.

> I would argue that, in a deflation, China will fare far worse than
> the US, as (ONLY, we are now assure) 20% of its economy is export.
> When that Goes Away, they will Never hit the growth targets they
> think They need to prevent unrest (8%, last time I checked), and
> it'll be back to the 'good old days' for China.

On the other hand, I would argue that inflation is more likely than deflation in a country with a fiat currency. In fact someone posted a quote from Bernanke on here today to the effect that they could create inflation almost at will.

But even if we have a large drop off in demand, I've also seen posts detailing how China is trying to move away from such a dependence on exports to the U.S. Their own economy has been growing and they've been establishing trade relationships with other countries. One article indicated that they expected domestic demand increase to such a point that they might even have a trade deficit in the fairly near future.

In any event, I doubt they'll be *forced* to sell large amounts of their gold holdings in the near future. It seems a lot more likely to me that they'll be net buyers of gold in exchange for dollars, particularly if their public proclamations are to be taken even semi-seriously. They are awash in our IOUs which unlike the gold has little intrinsic value apart from "the full faith and credit of the U.S. government" which has already filled their coffers with hundreds of billions of those IOUs.

> Put another way - when we have a depression, we get Roosevelt. When
> China has a depression, they get Mao.
> Different this time? I SURE hope so. But hope is not a strategy.

I have to wonder sometimes whether Obama might not be a little closer to Mao than to Roosevelt. ;) But I get your drift. But I'm also not so sure that China automatically goes into a depression even if we do, or that even if they do that it would necessarily be as severe as our own. They could probably weather it a lot better than we could and aren't in the massive debt situation we are with massive deficits as far as the eye can see -- and a flood of baby boomers on the verge of retirement waiting to cash in *their* IOUs. It seems to me that the U.S. would be more likely to be forced to sell tons of gold, though it sounds like there are various theories as to how much we actually have available to sell if push came to shove in that department.

Nov 04 06:50 PM

[Jasper M:]

For Jeff:
"I'd be interested in looking at a paper or chapter to a relevant article if you have one. "
1) von Mises is a pretty thick read. Hayeck is easier, but not so rigorous. If you are going for pure ease of digestion, I would recommend absolutely anything Robert Prechter has written on the subject in the last ten years.
OR . . . when it comes to money supply, you can pretty much do your own research, using things like M2. Yes, they don't publish official numbers anymore, buy, like the CRB, others have stepped in to fill that gap.
M2 is mostly bank accounts, which, in law and in fact, are just an IOU from the bank (with an ever shakier guarantee). Compare them to the only truly durable parts of the Money supply, cash, and gold, and you have a treMENdous credit overhang.

2) ". . . it doesn't seem as if the Fed would allow hundreds of billions of credit dollars to vanish in smoke over the course of a lazy afternoon even though that is, of course, theoretically possible. It would just be too devastating for the economy for them to allow it."
The Fed has no capacity to price these debts, precisely because there are so many preexisting ones already out there - much like printing currency (albeit fast), if they attempt to artificially boost the price, they inescapably undermine the value of all those preexisting debts (by reducing value of dollars to be paid), lowering their aggregate value by at Least as much as they inflated, + some additional penalty based on fear of more of the same.
The result is net credit destruction, which means net money supply destruction, beCause of, and at least as fast as, their attempts to halt it.
But never mind the theory: You'll note the 30 year bond is beLow were they announced QE. It's already started.

3) Bernanke is a self deluded sophist, trying to jawbone his way to victory. The fact is, most of their money supply creation techniques depend on a well functioning economy to work. Money velocity. Once a deflation really gets going, they do Nothing.
That just leaves the physical printing presses, which would take DECADES to fill the hole in money supply.

4) China is Trying to move away from export dependence the way most smokers try to move away from their habit. Too slowly; the crisis is right around the corner.
And diversity of trading partners will not save them here, as depressions are world-wide phenomena.

5) I trust the public proclamations of the heirs of Mao exactly so far as I might toss them. They will sell their gold for the things they cannot produce on their own, and which a dearth of trade will leave them no currency to buy with.

6) My foreceast for severity is independent of debt load (most will be defaulted on both in the US and in China), but on dependence on trade, which Always suffers in depressions. They THINK (pronouncement) they need 8% growth to stem unrest. They WILL not get it.
What do you suppose the response will be, on the part of a Communist state, when the model they have committed to so severely completely falls apart? While I don't relish dwelling on the details, suffice it to say I am confident the results will NOT be good for business.

Meanwhile, the explosion of the $US, vs., well, Everything will give the US Treasury a leg to stand on, as what little tax receipts it gets will be in more valuable currency.

This is all off the top of my head (or through my hat, according to some). For a better constructed (or just more slowly written) read, I have several posts on my Instablog re Deflation and China.

Nov 05 04:06 AM