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February 20, 2010

IMF Announced to Block the Gold Bullion

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It was reported that the International Monetary Fund sold 200 metric tons of gold to India last year for about $6.7 billion. All told, the IMF has sold some 212 metric tons of gold to central banks since September 2009 out of a total authorized 403.3 metric tons. That is about one-eighth of the IMF’s total gold holdings.

The IMF has announced that it would sell the remaining 191.3 metric tons on the open market. The sales will be phased to avoid disrupting the gold market. The announcement caused a sharp dip in spot gold prices this morning, to under $1,100 per ounce on the London market. Prices have recovered since then to about $1,119 per ounce.

The IMF is selling the gold to accomplish two goals. First, the IMF is using the proceeds of the sales to establish an endowment that it will use to produce income to cover its administrative expenses. Second, to generate more resources to fund a $17 billion loan fund for low-income countries, primarily Africa, that have suffered the most from the global financial crisis.

The World Gold Council has reported that demand for gold fell by 11% worldwide in 2009, while prices were up 12%. In the fourth quarter of 2009, gold averaged $1,099.63 per ounce, up 38% from the same period a year ago.

The growth in gold demand came mainly from ETFs like SPDR Gold Shares (GLD), iShares Comex Gold Trust (IAU) and PowerShares DB Gold (DGL). ETF demand for gold in 2009 topped 594 metric tons, up 85% from 2008. Almost half that growth came in the first quarter, when everyone thought the world was going to hell in a handbasket and piled into gold. By the fourth quarter, demand from the ETFs had fallen to just 31.6 metric tons.

Going forward, if the economic recovery falters, gold will once again play its role as a safe haven. If the recovery strengthens, gold will assume its role as an inflation hedge. Either way, the demand for gold is likely to increase.

The IMF’s gold sales are not likely to have much impact, either long-term or short-term on the spot price of gold. The dollar value is just too small. Sure, 191 metric tons sounds like a lot, but it’s probably only around $6 billion worth of gold. That just isn’t enough to swing the gold market much one way or another.

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