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IMF Gold Sale Will Likely Backfire On US Government
By Patrick A. Heller

After the COMEX closed on Wednesday, the International Monetary Fund (IMF) issued a statement that it would sell the remaining 191.3 tons (6.15 million ounces) out of its original 13 million ounce gold sale to “the market.”

Last year, the initial gold sales were made “off-market” to the central banks of India, Mauritius, and Sri Lanka.

In response to this announcement, the price of gold initially fell sharply, as much as $24 from the COMEX close. During COMEX trading yesterday, as investors had time to digest the impact of this development, prices recovered lost ground.

There are several implications about the nature and timing of this announcement that actually bode well for rising gold prices in the short as well as long term.

The real reason for this announcement (and its timing) had more to do with trying to suppress the price of gold than to serve the purposes of the IMF. Gold’s price had started to take off this week, with a significant prospect that it could soon take out the all-time high set in early December 2009. Since the price of gold is a report card on the US economy, government, and dollar, there is a lot of incentive in Washington, DC to hold down gold.

There is a significant possibility that much of the IMF gold “holdings” have also been double counted as part of the gold reserves of IMF member nations. Literally, some of this gold supposedly being offered for sale may actually not exist. Trying to sell some of its gold reserves represents a significant risk to the IMF that this double-counting could be exposed.

If, and that is a mighty big if, any of this gold ends up being sold to the general public, I suspect that it will only be a token quantity. The IMF did admit that it is possible that some of the 193.3 tons could end up being sold to central banks (or “off-market”). If this happened, that would reduce the amount being sold on the market.

Some of the gold may well be sold to central banks. But I expect the largest purchasers will end up being the large banks and brokerage firms that have huge short positions in gold. They could use such purchases to reduce their short positions without having to take actual delivery of physical gold.

If the IMF were really looking to sell gold for the maximum possible price, they would not announce the sale in advance as they did this week. That would almost certainly have the effect of knocking down the price of gold—exactly what did occur for a time. This is the same tactic used by the Bank of England to make sure their gold sold for the lowest possible price a decade ago.

Also, the timing of this announcement is mighty convenient for those looking to suppress the price of gold. Next Tuesday is an options contract expiration date. There are over 5,000 call option contracts at a strike price of $1,100 calling for delivery of physical gold (over 500,000 ounces). Dealer gold inventories on the COMEX are down to 1.65 million ounces and falling fast. So, if the gold price closes below $1,100 next Tuesday, that buys a little breathing space for the US government. Should it close above $1,100, these options would be exercised, creating a significant supply squeeze. By softening up the price a few days early, the IMF is cooperating with the member central bank having the largest voting power.

Back in the 1970s, the IMF made another large gold sale, again to support efforts to hold down the price of gold. Once that sale was completed, the price took off. Once the furor of Wednesday’s announcement dies off, no matter when the gold is actually sold or who buys it, I expect the price of gold to resume its nine-year long term bull market rise.

 



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