Why China and India Want the IMF to Sell Its Gold

Includes: GDX, GLD
by: Brian Kelly

There has been a considerable uproar over the fact that both India and China have asked the IMF to sell all its gold. Subsequently, India denied it has done any such thing, but I ask: Who cares?

First, if the IMF were to sell all its gold the impact on the gold market would be primarily psychological. The IMF holds a total of 103 million ounces of gold or approximately $100b. Even though the gold market is small relative to other financial markets, 103 million ounces is still not significant. In February, the London Bullion Market Association (LBMA) reported that it traded 23.8 million ounces per day on average.

IF the IMF simply dumped its gold on the market they would be able to sell the whole position in 5 days. However, this is unlikely due to IMF restrictions on gold sales and the fact that the US holds veto power over such sales. As one of the largest holders of gold, the US clearly has an incentive to keep the price relatively stable.

The more likely outcome is that the IMF does sell some of its gold in an off market transaction to China or a GCC nation. These nations are desperately trying to diversify their dollar holdings and what better way to do that then to stockpile gold. In fact, there are reports that China is stockpiling copper; it is only a matter of time before reports of Chinese stockpiling gold are “leaked.” Moreover, a sale of IMF gold to China, India or the GCC would transfer the metal from relatively weak hands to stronger hands.

Disclosure: I am long GDX