As I have explained several times, the multi-year publicity over the possibility that the International Monetary Fund (IMF) might sell of part of its gold reserves was really only a tactic meant to help the US government suppress the price of gold.
Early on, the mere threat that the IMF was considering a possible release of gold reserves was successful in driving down the price of gold at least 10%, where it typically took at least three months to recover. The pretext given for such sales changed over time, but always involved unloading about 400 tons (12.9 million ounces) of gold. Until last year, the potential IMF sales never materialized.
By 2009, demand for physical gold was so strong that the threat of a possible IMF gold sale no longer had much impact on prices. Gold’s price would drop only 1-2% and then recover within a few days. To try to have a larger impact, the IMF was forced to actually commit to selling gold instead of just talking about it.
However, even the actual sale of gold could not overcome growing demand. China not only stated that it was willing to purchase the entire lot of gold the IMF was putting up for sale (403 tons or 13 million ounces), but it was ready to pay cash to acquire all of the IMF gold reserves of more than 100 million ounces!
What ended up happening is that the central banks of India, Sri Lanka, and Mauritius purchased just over half the IMF gold in “off-market” transactions. The bulk of these sales went to India, one of four nations that is supposedly the custodian of the IMF gold reserves. There is significant suspicion that this particular sale may have been done to replace prior secret sales of gold intended to help suppress gold prices. It is possible that the gold sale to India’s central bank may have been settled by bookkeeping entries rather than the actual transfer of physical gold.
Since these gold sales to central banks did not have the desired effect of knocking down prices, the IMF suspended further sales. Six weeks ago, the IMF announced that it planned to sell the remaining 191.3 tons (6.15 million ounces) of its gold to “the market.” By trying to make it appear that this amount of physical gold might actually be sold to “retail” buyers, the hope of the US government and the IMF was that the price of gold would decline.
This announcement did not produce enough of an effect at knocking down gold prices. Within 24 hours, the price of gold sank as much as $24, just over 2%, and then almost completely recovered.
In this announcement, the IMF did anticipate that some of the gold might be sold to central banks. At the time, I predicted that little if any of this gold would actually be sold to the general public.
My prediction appears to have been accurate. Last week, Sprott Asset Management of Toronto announced that they had contacted the IMF to try to purchase the entire remaining amount of IMF gold supposedly for sale.
Sprott received $400 million from investors from its initial public offering on February 26 for Sprott Physical Gold Trust (symbol PHYS), the beginning of what is expected to be a much larger fund. This closed-end mutual fund used the proceeds of the stock sale to purchase a large quantity of 400-ounce London Good Delivery gold bars for storage at the Royal Canadian Mint.
This Sprott fund will own specific gold bars, not paper gold. Owners of sufficient shares have the option of turning in their shares and taking delivery of the physical gold bars, with current delivery costs running about 6% of the value of the gold content. As Sprott prepares to sell its next round of shares, it obviously needs to acquire large quantities of physical gold from somewhere. The IMF gold for sale would be a perfect fit as some of it could be allocated to the Sprott Physical Gold Trust and the balance to other Sprott funds.
However, such a sale of IMF gold would not offer the US government or the IMF the opportunity to push down the price of gold. In fact, such a sale would almost certainly emphasize just how strong physical demand really is—with the result that the price of gold could rise! So, it is no surprise to me that the IMF flatly turned down the prospect of selling gold to Sprott.
Another reason why the IMF may be so reluctant to sell physical gold to the public is that its “holdings” appear to have been double counted (required by former IMF regulations) as part of the respective nation’s gold reserves. Should the IMF actually sell gold to the public, that may expose this double counting of gold reserves.
The IMF’s refusal to actually sell gold that it claims it has for sale, when coupled with the evidence of gold and silver price manipulation entered in the official record as part of last week’s hearings by the Commodity Futures Trading Commission, could end up providing a boost for precious metals prices. I had earlier predicted that the price of gold would surpass its early December 2009 record by the end of March 2010. It doesn’t look like that will happen by tomorrow’s close. However, market signals point to a new record high in the very near future. I think my forecast will soon prove right on the direction, though slightly off on the timing.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/