Last Updated : 20 June 2009 at 15:00 IST

IMF gold sale plan gets US Congress approval

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Commodity Online
NEW YORK: Finally, there is some clarity on International Monetary Fund’s (IMF) plan to sell 400 tonne gold. The US House of Representatives has approved an agreement to allow US members of the IMF board to agree the proposed $13 billion sale of 400 tonnes of IMF Gold to shore up its finances.

This means the US has given the green light for the IMF gold sale. The last hurdle for the IMF is the US Senate. But despite this there was virtually little or no impact on the gold market. In part this may be because of scant publicity being given to this part of the funding approval, but also in that firstly the gold market has largely discounted the IMF gold sale anyway, and secondly in that the IMF has said it will dispose of its gold in an orderly manner through a system such as the Central Bank Gold Agreement which limits sales volumes in a given year.

However the current CBGA runs out in September and there has been no announcement yet of a renewal beyond that date. Given Central Bank gold sales under the CBGA appear to have dropped sharply over the past year it may be felt there is no longer a necessity for a new agreement. Indications are that some major Central Banks, notably the Russian and Chinese ones, as well as some Middle Eastern banks, are likely to increase gold holdings in part in an attempt to diversify reserve dependence away from the US dollar given the mixed views on the greenback’s future path due to the huge amounts of money being pumped into the US economy to try to stave off recession.

Overall such moves will end up being long term positive for bullion. If and when IMF gold sales do hit the market there may be short term adverse consequences, but if this gold is seen to be quickly absorbed (perhaps by Central Banks looking to build gold reserves) then there could be a quick rebound.

Meanwhile, World Gold Council welcomed the US Congress’s decision to okay the IMF gold sale.

The IMF gold sale process began with the Crockett Report in 2007, which recommended that the IMF adopt a new income model, including the establishment of an endowment, funded by the proceeds of limited and structured Gold sales. More recently at the G20 summit in April, heads of state proposed to use additional resources from the gold sales to provide an extra $4 billion for poor and indebted countries over the next 2-3 years. This will not impact either the total level or the manner of the gold sales.

The IMF has stated publicly that its gold sales should be coordinated with current and future Central Bank Gold Agreements (CBGA), whereby signatories have agreed to limit their gold sales to no more than 500 metric tons annually.

Aram Shishmanian, CEO, World Gold Council, said “We are pleased to see that the IMF’s plan to sell gold in a structured and non-disruptive manner has gone through due political process without problem, which is a credit to the responsible behaviour of all parties involved in the process. These sales will not constitute any net addition to the amount of gold the market is already expecting from official sector sources as a whole, and therefore we anticipate zero market impact. We believe this announcement, if anything, will Lead to positive sentiment among market participants as it clarifies that there will be no net addition to overall gold supply.

“In these times of financial instability, gold’s universal role as protector of wealth has come to the fore, not least as a crucial part of reserve asset portfolios. The fact that these sales will effectively rescue the IMF from a difficult situation regarding its own finances is proof of gold’s unique investment characteristics, long-recognised by central bankers and institutional and retail investors alike.”

Given the IMF’s status as “a lender of last resort”, World Gold Council believes it is imperative that the organisation continues to hold large gold reserves and acknowledges the IMF’s public declarations that:

“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.”