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Obama Administration pushes IMF gold
by Lawrence Williams

The U.S. House of Representatives has passed a bill which included an expanded credit facility for the IMF and effective U.S. approval for the proposed IMF sale of 400 tons of gold.
The Obama administration has pushed a bill through the U.S. House of Representatives approving $106 billion in supplemental funding, primarily for the Iraq and Afghanistan 'security' efforts, but attached to it was also an expanded credit facility for the International Monetary Fund (IMF) of a massive $108 billion which included an agreement to allow U.S,. members of the IMF Board to agree the proposed $13 billion sale of 400 tons of IMF gold to shore up its finances.
In theory the US. approval of the IMF gold sale, which still has to pass through the U.S. Senate would be the final hurdle in the gold sale actually going ahead. But despite this there was virtually little or no impact on the gold market. In part this may be because of scant publicity being given to this part of the funding approval, but also in that firstly the gold market has largely discounted the IMF gold sale anyway, and secondly in that the IMF has said it will dispose of its gold in an orderly manner through a system such as the Central Bank Gold Agreement which limits sales volumes in a given year.
However the current CBGA runs out in September and there has been no announcement yet of a renewal beyond that date. Given Central Bank gold sales under the CBGA appear to have dropped sharply over the past year it may be felt there is no longer a necessity for a new Agreement. Indeed indications are that some major Central Banks, notably the Russian and Chinese ones, as well as some Middle Eastern banks, are likely to increase gold holdings in part in an attempt to diversify reserve dependence away from the U.S. dollar given the mixed views on the greenback's future path due to the huge amounts of money being pumped into the U.S. Economy to try to stave off recession - or even depression.
In their April Fortis Bank metals monthly, the London based VM Group commented that "There are some good arguments against a CBGA renewal. The original 1999 Agreement arose from a structural weakness in the gold market. Back then, a class of investors (the Central Banks) believed they were massively overweight in gold and wanted to sell; the Central Banks decided to collaborate on a selling programme in order to ensure that they drip-fed gold onto a market that was already very weak. Those conditions are arguably no longer relevant.
"If there is no renewal of the CBGA, that would send a tremendously bullish signal to the gold price, at a time today when there are many more actors on the buy-side (such as private investors) and an obviously slowing interest to sell.
"This would boost gold's status as a reserve asset, giving holders greater flexibility in how they bought and sold it. It would also encourage other Central Banks with large forex reserves but little gold (such as China) to buy. After all who wants to buy something for which they need an Agreement in order to re-sell?"
But back to the U.S. Moves. Writing in the Wall Street Journal, economist Judy Shelton comments: "The Obama administration went to great lengths to get the IMF its billions. Last week, congressional leaders received a letter that made a firm connection between global economics and global security. "We know from the 1930s that a protracted global economic slump can foster undesirable and unforeseeable reactions to hardship and adversity," it stated. "Financial hardship and poverty breed desperation, which helps terrorist networks to attract new recruits with messages of hate, violence and intolerance." The letter then urged Republicans and Democrats to support the President's request for IMF funding. "We believe that the current instability poses a significant risk to the long-term prosperity and security of the United States." It was signed by Secretary of State Hillary Clinton, National Security Adviser James Jones, and, most notably, Secretary of Defense Robert Gates."
Shelton's view is that this was an attempt to pressure representatives into voting in favour on the grounds that a well financed IMF might provide a further bulwark against global financial collapse leading to global instability and would thus be a threat to greater U.S. security. She questions this both on economic grounds and on whether the IMF is indeed the right vehicle to handle such a policy.
"Officials concerned about global security are right to recognize that financial instability breeds discontent and fosters social resentment that can challenge ruling interests and topple whole regimes." says Shelton. "The question is whether short-term fixes -- in the form of emergency loans to a flailing government, the sort of assistance the IMF is prepared to offer -- provide a solid foundation for economic growth."
Part of the problem, in Shelton's view, is that the IMF is no longer capable of fulfilling its role of overseeing an international monetary system because, since the end of the Bretton Woods era there is effectively no global monetary system and that all the IMF can offer nowadays is "the prospect of lurching from one short-term economic fix to the next."
Where does this leave gold? One would think that overall such moves will end up being long term positive for bullion. If and when IMF gold sales do hit the market there may be short term adverse consequences, but if this gold is seen to be quickly absorbed (perhaps by Central Banks looking to build gold reserves) then there could be a quick rebound.
Fundamentals don't necessarily look good for gold at the moment, but the gold market is notable for ignoring fundamentals at least in the short term. It has been retaining its price levels reasonably well in the face of low jewellery demand and a resurgent dollar - both normally very adverse factors. Investment demand seems to be stable. People are still nervous. Gold still offers a degree of wealth protection which most other markets do not at this continuing time of economic turmoil.


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