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February 07, 2007

Gold Forecaster - Global Watch
by Julian D. W. Phillips

Below is a snippet from the latest weekly issue from www.GoldForecaster.com | www.SilverForecaster.com

I.M.F. past & future Gold sales - The effects Part 1 + Gold in the € & the Yen
Proposals have been put forward to sell 400 tonnes of gold from the I.M.F. holdings. The extra money is needed to help plug an estimated shortfall of $400m a year in the I.M.F.' current income and expenses by 2010.

The IMF has 3,217 metric tons of gold and the sale of 400 tonnes could raise $8.4 billion at current market prices.

This is one of several proposals put forward by a committee of carefully selected eminent persons who have now issued a report, attempting to provide solutions to the I.M.F. as to how to solve the cash flow problems that have led this august monetary body to recommend a new 'income model' including nominal gold sales by the International Monetary Fund. The Committee comprised the following eminent persons; Andrew Crockett, former director general of the Bank for International Settlements and currently president of J.P. Morgan Chase International; Mohamed A. El-Erian, president and CEO of Harvard Management Co.; Alan 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.

Commentary
In our opinion none of these figures, whilst highly respectable, have the power to influence the diverse national Central Banks who actually own the I.M.F. gold. The Executive Officials of the I.M.F. cannot act independently of the Member states comprising the I.M.F.

• The governor of the People's Bank of China [which holds a tiny percentage of its reserves in gold -1% or less now] is suspected of wanting to increase these holding and would only be too happy to use some of the $ trillion they currently hold in their reserves to purchase any I.M.F. gold direct from the I.M.F.
• M. Trichet, whilst president of the European Central Bank is not a President of a National Central Bank, so must be perceived as a professional bureaucrat, advising other people on how to use their money well.
• Tito Mboweni is a Central Banker, but of a nation with a currency regarded as soft, despite it being one of the world's gold producers. We believe he will not hold sufficient sway to persuade the world's Central Bankers to sell their gold held by the I.M.F.
• The rest, with all due respect are qualified consultants, not owners of the gold that is being recommended for sale.

However, Managing Director Rodrigo de Rato, the head of the I.M.F, submitted the report to the I.M.F. executive board. In essence then, we see this as simply a recommendation by consultants to a body whose members have the task of approving it, not the Officials of the I.M.F. This is important for the present I.M.F. policy on gold is very clear

Present I.M.F. Gold Policy
The I.M.F.' current policy on gold is governed by the following principles: -

• As an undervalued asset held by the IMF, gold provides fundamental strength to its balance sheet. Any mobilization of IMF gold should avoid weakening its overall financial position.
• Gold holdings provide the IMF with operational maneuverability both as regards the use of its resources and through adding credibility to its precautionary balances. In these respects, the benefits of the I.M.F.' gold holdings are passed on to the membership at large, to both creditors and debtors.
• 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.
• The IMF has a systemic responsibility to avoid causing disruptions to the functioning of the gold market.
• Profits from any gold sales should be used whenever feasible to create an investment fund, of which only the income should be used.

Déjà vu

• We wrote a considerable amount on the attempts by the British Chancellor of the Exchequer, Gordon Brown's attempts to persuade the I.M.F. to sell its gold to support his chosen cause. At that time too, the U.S. had a mild sense of humor failure.
• France faced a similar crisis to the one the I.M.F. faces now and the French government wanted gold to be sold to repair past damage. Eventually political pressure forced him to bow and we now see an unhappy Banque de France selling gold. But we remember the comments by the governor of the French Central Bank, M. Noyer who likened the selling of gold to selling the 'family jewels'.
• Germany faced a similar problem when the Reischstag wanted the Bundesbank to sell gold for government dictated reasons. In Germany it requires changing the law to permit this, but before that was even contemplated the Bundesbank President made it very clear just how unhappy he was to put such proposals into action.

So the past reactions of the States, Germany and silently, others, are against such sales.

And the gold will be sold for what? Special Depository Receipts were intended to be the global money of last resort, a concoction by the I.M.F., which would have allowed them [with the huge support of the States] to debase gold's role in the Monetary system. Most people have not heard of this money let alone respect it. So in essence it is an attempt to raise liquid funds in paper money form to earn interest to resolve the cash flow of the I.M.F.

Why sell their gold when the other suggestions in the list of recommendations can resolve the cash flow problem?

In the next issue of the Gold Forecaster we will look at details of past I.M.F. sales and the various options available to the I.M.F. if gold sales were approved and the several impacts these could have on the market and the gold price.

Euro Gold Price: $1.30185/ €502.59-ounce

Technical Commentary:
€ gold breakout! The price has broken past the €500 resistance and heading for last summer highs. €540-560 are now the next major upside targets. Right now the short-term challenge is €510-515 with good support around €500.

Japanese Yen Gold Price

Japanese Yen: - Yen 120.915: U.S. $1

Gold in Yen: Y79,114.68 against last week Y77,963.50 per ounce

The Japanese Yen is a U.S. $-centric currency deeply affected by its level with the U.S.$

Technical Commentary:
The Japanese Yen gold price is retesting its record highs from early 2006. Many foreign gold prices are breaking out and the Yen is no different. Watch for a close above prior record highs to initiate the next leg higher!

Julian D. W. Phillips
Gold-Authentic Money

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price. FIND OUT MORE

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