IMF Gold Sale Will Likely Backfire On US
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.