COMMENT: The International Monetary Fund, IMF, announced on September 18, 2009 that it was going to proceed with the sale of about 1/8th of its gold holdings in order to provide lending to low-income countries affected by the recent global economic slowdown. The IMF is the third largest recorded holder of gold trailing only the United States and Germany. The IMF emphasized that the Fund would attempt to conduct the sales in a way that would not disrupt the gold market and though this sale was off market it was completed at prevailing market prices from the prior two weeks. The sale to India of half of the planned sales is somewhat surprising, not because it was India, but because it is revealing that one country would have an appetite for acquiring so much gold at prices that we have not been seen in decades. While it would not be shocking to see China purchase some gold from the IMF, it would be telling if the country did buy the metal in any large quantity. China could supplement their massive dollar holdings by buying gold, but as there is finite supply of the precious metal in the world, there simply is not enough gold produced to cover the Chinese needs. A large public purchase of gold would indicate that China has less confidence in the U.S. dollar than it has already stated.
The IMF has sold large quantities of gold in the past. From 1957-70 the IMF sold gold to replenish its holdings of currencies. In 1970 and 1971 the IMF sold gold to its members that it had acquired from South Africa. From 1956-72 the IMF sold gold to the United States and invested the proceeds in U.S. government securities. The IMF later required this gold from the U.S. From 1976-80 approximately 1/3 (50 million ounces) of gold was sold by the IMF after an agreement by the organization to reduce the role of gold in the international monetary system. Half of this amount was sold to members and the other half was auctioned to the market. This amount was used to supplement lending to low-income countries. This is similar to today’s plans.
Gold, year to date through November, is up 23 percent. This in large part has been due to the weakening of the dollar. So long as the Federal Reserve keeps borrowing costs low the dollar will likely continue to depreciate relative to other currencies around the globe.
Further Reading: London Bullion Market Clearing Turnover