Gold's Golden Rule

Includes: GDX, GLD
by: Investing The Middle Way

Gold was weak Monday on the heels of news that the Treasury Department is lobbying congress to allow the International Monetary Fund [IMF] to sell 400 tonnes of its gold. Here's the original Reuters report of the planned gold sale. If we look at where the potential systemic financial failures are today, we'll come up with a handful of countries that, let's say, were never intended to be the recipient of IMF funds when it was founded. Surely, that irony is not missed by many. Be as it may, I don't expect the bureaucracy to call for its own demise, hence I don't yet consider its attempt to shore up revenue by selling gold as gold price manipulation.

On the other hand, similar proposals have come before, and each time the U.S. Congress, proving that its collective IQ is at least in the double digits, rejected them. Perhaps it is even aware of the golden rule:

He, who has the gold, makes the rules.

While 400 tonnes may sound like a lot (about $12 billion at current market value), it is a drop in the bucket compared with central bank reserves of countries that have stated their intention to diversify away from U.S. dollar-denominated assets. Click on this link for a list of central bank gold holdings as a percentage of total reserves.

A clear dichotomy exists between the Central Banks of the "East" and "West." Since the annual production of gold is a small fraction of the above-the-ground stock (a defining characteristic of monetary metal, one might add), the best way to increase Central Bank gold holdings is to buy from other Central Banks. Hence, I predict that no matter how much of its gold the IMF will sell, it will find eager buyers. Meanwhile, any price weakness is a gift to buyers of physical bullion.