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IMF would sell gold because European central banks won't anymore

Section: Daily Dispatches

By Michael Kosares
Centennial Precious Metals, Denver
Wednesday, January 31, 2007

I don't think we are going to see any sale of gold by the International Monetary Fund. It looks like the Central Bank Gold Agreement's inability to reach the 500-tonne quota for the 2006 agreement year (only 350 tonnes were sold) left more of an impression than any of us realized.

The IMF's Committee of Eminent Persons, which interestingly included the head of the Chinese central bank and former Fed Chairman Alan Greenspan, is saying essentially that the IMF "could" supply the shortage left if the Central Bank Gold Agreement can't meet the 500-tonne allotment in the future. This translates to market neutral because, theoretically, whether the IMF sold gold or not, no more than 500 tonnes would go on the market over the CBGA year.

It seems that the gold banking system needs roughly 50 tonnes of gold liquidity each month to keep from locking up. There is a natural deposit attrition rate in the gold banking business. In the natural flow of things, individuals and entities request their gold deposits back, and somehow 50 tonnes seems to get the job done. That 50 tonnes has to come from somewhere, and lately the European Central Bank system has been stepping up when the liquidity gets tight -- as the gold supplier of last resort. It may that the European banks have signalled their intent to withdraw further from the CBGA allotments (maybe France is about to back out of sales?), and the IMF group is trying to fill the gap.

And maybe more depositors might want their gold back, since many of them are stretched Third World banks and depositors from places like the Persian Gulf and fewer central banks are willing to part with their gold.

At any rate, it's an odd assortment of "eminent persons" in this IMF group, and we should take note of its composition: Andrew Crockett, former director general of the Bank for International Settlements and currently president of JPMorgan Chase International; Mohamed A. El-Erian, president and CEO of Harvard Management Co.; Greenspan; Tito Mboweni, governor of the South African Reserve Bank; Guillermo Ortiz, governor of the Bank of Mexico; Hamad Al-Sayari, governor of the Saudi Arabian Monetary Agency; Jean-Claude Trichet, president of the European Central Bank; and Zhou Xiaochuan, governor of the People's Bank of China.

You can always tell that Greenspan has had a hand in the festivities when you read sentences like the following: "The limited sale of fund gold should be ring-fenced to exclude further sales and subject to strong safeguards to limit their market impact."

There is no doubt in my mind that China would like to see the IMF sell ALL its 3,217 tonnes of gold, particularly if China might become a primary recipient. Without any fanfare China would happily write the check for all 3,217 tonnes. Otherwise, I can't imagine why the Chinese central bank might have been included on this IMF committee, unless it was to demonstrate that the system is at least trying to get them some gold. Perhaps the Harvard Management Co. is thinking similarly (smile).

To round this off, we should remember that the last time British Chancellor Gordon Brown tried to get his hands on the IMF's gold, he was stopped dead in his tracks by the U.S. Congress. This new attempt to shake loose the IMF's gold may be happening because the new Congress might be more amenable than the last.

From the view of these "eminent persons," it's at least worth a try. But they may be in for some rough sledding. Key Democrats were opposed to the last IMF gold sale proposal because suppression of the gold price meant reducing the income of Third World gold-mining countries. That's probably why this IMF committee assiduously addressed the price-suppression concerns. We should remember that the United States holds virtual veto power over IMF actions. We'll see if Congress is more amenable this time around, but we have our doubts.

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