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April 14, 2008

The I.M.F. Gold Sales Will Be Very Good For the Gold Price
by Julian D. W. Phillips

Most commentators we now read are taking the potential I.M.F. gold sales as a foregone conclusion. With the unknown quantity of the U.S. Congress [who are fully aware of just how good an investment gold has been and will likely be], who blocked the sales last time it was proposed, the sale is by no means a foregone conclusion. But of far greater importance is the question of how these sales could affect the gold price. The answer is exceptionally positive, after we consider the views of the I.M.F. itself on just how the sales will be orchestrated.

Only one obstacle remains.
The focus on whether the sales will take place has been on the U.S. Congress who, if they approve will give the nod to 16.83% of the votes of the I.M.F. With the Executive of the I.M.F. having approved the sale already, once the Congress has said yes, the deal is struck.

Let's move onto the likelihood that the sales will be finally approved, what then? Just how will the sales move forward in the light of the intriguing statements coming from the I.M.F. executives? What are these statements?

The key statements have recently come from IMF Finance Department Director Michael Kuhn who said: -

• The gold sales will take some time. First, the Executive Board has just endorsed the proposal to amend the Articles of Agreement to expand the IMF's investment authority. This amendment needs to be approved by the Board of Governors, and then make its way through national legislatures. It looks as though a year is the shortest time for entry into force of an amendment of our Articles.

• The gold sales will be phased to avoid the risk of disrupting markets. So we won't see the full effect immediately, but we estimate that 3 or 4 years from now, we should be back in the black.

• As for the modalities of the gold sales, we will either sell to a central bank that is willing to buy gold, or sell in conjunction with the already established official gold sales program -- the Central Bank Gold Agreement.

• We will coordinate with other official holders of gold to sell in such a way that we do not increase the overall amount of official gold sales into the market.

• Naturally, the sales will be conducted within a strong framework for governance and controls, and with a high level of transparency. We are the world's third largest holder of gold, and we are keenly aware of our responsibility not to disrupt the gold market.

Which Central Banks could be interested?

Russia?

The implications of these statements are riveting! We know, for instance that Russia has the intention of increasing gold reserves to 10% of its reserves, so for them to buy would barely dent this number. A direct deal between the I.M.F and them would be at a market related price and not be seen by the market at all. The only impact such a deal would have would be the reaction by the market to the subsequent announcement of the sale.

China

We know that China too has a ridiculously low level of gold reserves and is highly suspicious of going into the open market because once there were even suspicions that that was happening, gold prices would rocket. [This has limited them to buying their own local production or none at all]. But with 400 tonnes on offer at one price [and no gold price impact], perhaps they would jump at the opportunity?

Other U.S. $ surplus nations?

• There are several other Asian nations who might well be interested in buying a large tonnage of gold at a price that is in line with market prices, at one go. With the U.S. $ in such a decline and with no change in sight, what better way to protect the naton's saving than to change a chunk of these into gold.
• The oil producers of the world, from the Middle East to Venezuela might also find the offer extreemely tempting too? The very sight of such a large amount of gold on offer handled in such a way as to not disruot the gold market changes the propsect of buying gold fundamentally.

So we do believe, that should the I.M.F. choose that route, when they are ready to sell, they will do so quickly and painlessly and at market. The market reaction to a Central Bank buying gold would be positive in the extreme! It would confirm gold's value as a reserve asset in difficult days. Institutional Investors as well as individuals of high worth would follow such a lead. This would attract a far greater volume as well number of gold investors to the market and change the tempo of gold investing considerably.

...not increase the overall amount of official gold sales...

Many believe that the I.M.F. is referring to the "ceiling" of 500 tonnes a year, but that is a limitation, not the expected "overall official gold sales into the market". It would take more clarification from the I.M.F. for us to accept that they were referring to the "ceiling".

So, just what does this mean, we ask again? If the signatories have announced a total gold sales level of 1730 tonnes at the beginning of the Central Gold Bank Agreement and have only say 400 tonnes [which may well be close to the amount remaining at the end of September this year [the end of the fourth of five years of the agreement], then that is the extent of the planned "official gold sales into the market", so their sales would have to replace this amount. However, this reasoning may be at fault, if there is still a year to go before these sales can take place?

It would require a new Central Bank Gold Agreement for the I.M.F. to work "in conjunction with the already established sales program" to begin in September of 2009 for this to happen. No such word is out there as far as we know?

This leaves us still in the dark as to precisely what is to happen once these sales are finalized.

This week saw NO GOLD SALES from the E.C.B. They did revalue their holdings at the end of the quarter and reported this this week, but sold no gold. It is the first time in the entire histories of both the "Washington Agreement" and the "Central Bank Gold Agreement" that we have seen no sales in a particular week! It is difficult to draw any solid conclusions from this but we remain riveted to the weekly E.C.B. reports from now on, and perhaps link the IMF activities to this?

Conclusions to be drawn on the effect on the gold prices:

The I.M.F. gold sales can only be positive for the gold price?

For the entire report, please visit: www.GoldForecaster.com.

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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