Saturday, April 4, 2009

>IMF gold sales wouldn't be too bearish for gold

London - Future International Monetary Fund gold sales are unlikely to depress the price of gold because central banks seeking to diversify U.S. dollar would be likely buyers, as recent data shows.

The G20 concluding statement this week said the IMF is going to raise $50 billion for low-income countries and part of that money is proposed to come from IMF gold sales.

IMF Managing Director Dominique Strauss-Kahn said the sales refer to the 403.3 metric tons already under discussion and still subject to U.S. congressional approval. No further sales were planned, he said.

Gold prices initially fell 3.5%, dipping below $900 a troy ounce, on Thursday's statement but, were the sales to go forward, analysts said they would be slow, orderly and absorbed by central banks.

"Central banks such as those in China, Russia and Japan are obvious counterparties to this kind of sale," Morgan Stanley analyst Hussein Allidina said.

Allidina said those central banks could diversify their large U.S. dollar holdings and buy IMF gold off-market, therefore limiting the affect on gold prices on the spot and Comex market.

The IMF has in the past sold gold to members off-market. For example between 1999 and 2000 the IMF sold 12.9 million ounces to Mexico and Brazil in authorized off-market transactions, some of which was sold back to the IMF.

The IMF has 3,217.30 metric tons of gold reserves, making it the world's third largest official holder of gold behind Germany and the U.S.

Like the U.S. and the Bank for International Settlements, the IMF adheres on an informal basis to the Central Bank Gold Agreement, a pact between 17 European central banks to sell no more than an agreed 500 tons of gold - worth about $14.5 billion at current market prices of around $900 a troy ounce - between them each year. The current five-year agreement ends Sept. 26 and analysts expect a new one to be negotiated.

Before any IMF sale happens, 85% of the fund's shareholders need to approve the proposal. Since the U.S. has 17% of the votes, it has a de facto veto over the proposal.

There are strict rules over how gold would be sold by the IMF - on its Web site, it says approval to sell gold would be granted only if the sale could be conducted in a way to minimize disruption to the gold market.

"The market managed to absorb CBGA sales and still move higher," said Philip Klapwijk, head of U.K.-based GFMS Metals Consulting.

European countries that are signatories to the Central Bank Gold Agreement have sold 80 metric tons of gold since the end of September 2008, when the final year of the agreement began, according to data in March.

"IMF sales don't necessarily mean trouble as long as investors continue to buy. It could also be attractive to central banks with large U.S. dollar holdings," Klapwijk said.

Recent data for central bank gold holdings from the World Gold Council shows there is interest among central banks to increase the percentage of gold in their foreign reserves.

In the first quarter of 2009, Russia's gold holdings rose by 29.8 tons to 523.7 tons at the end of March. Gold now makes up 4% of the country's total foreign reserves, from 2.2% at the end of 2008, the WGC data shows.

Russia's Alexei Ulyukayev, first deputy chairman of the Bank of Russia, said February the bank plans to continue buying gold to increase the proportion of reserves held in the metal.

Russia is not the only possible gold buyer. Ecuador's gold holdings more than doubled in the first quarter of 2009 reaching 54.7 tons from 26.3 tons at the end of 2008. This took gold as a percentage of foreign reserves to 31.6%, from 9.8% previously.

And in the same time period, neighboring Venezuela saw its gold holdings rise from 356.4 tons to 363.9 tons, or from 23.4% of its total foreign reserves to 35.5%, the data showed.

Were the 403.3 tons, or about 12.9 million ounces estimated at around $11 billion, of IMF gold sales to happen, it wouldn't be the first time the fund sold gold, nor the most it has sold. Klapwijk said in the 1970s, when the fund sold gold, prices remained fairly strong.

"When the IMF does sell gold it means things aren't going well, so a lot of people want to buy it," Klapwijk said.

Concerns about paper currency have also fueled interest in the precious metal and both Russia and China in recent days have called for the diversification of reserve currency, away from the U.S. dollar.

UBS analyst John Reade said he expects the gold sales to be approved and for them to happen over a two- to three-year period.

"In the current environment an additional 100 tons or 200 tons of gold sales per annum are almost insignificant compared to the changes taking place in investment," Reade said, maintaining UBS' forecast for gold to average $1,000 an ounce in 2009.