Monday, September 21, 2009

Will China Buy All of the IMF Gold For Sale? Will It Have the Opportunity To Buy It?

The IMF has finally approved the sale of 403 tons of its gold under the auspices of raising cash to help lesser developed countries.  The most recent Washington Agreement regulating Central Bank gold sales was drafted to incorporate the sale of IMF gold into the annual gold sales limits.  Interestingly, the ECB system is going to fall several hundred tons short of the 500 ton annual limit this year (and they fell well short last year as well), indicating a significantly reduced desire for European Central Banks to sell gold.  Also of note, the annual gold sales limitation was reduced from 500 tons to 400 tons, including the IMF sales.  Makes us wonder why they did this and keep in mind that, for the first time in nearly a decade, there were a couple of weekly periods in which the ECB system was a net buyer of gold...hmmm...

With regard to the IMF sales, let me point out a couple facts of which most observers are unaware.  First, the IMF gold is based on member pledges, as opposed to an outright physical allocation of gold.  The issue here is whether or not the sales of IMF gold will involve the outright sale of physical gold, which would require member countries to physically mobilize and sell their pro rata pledged gold, or if the IMF will settle for the cash equivalent.  In other words, will IMF member gold pledges be monetized with cash?

This is an important issue with regard to whether or not the market has already discounted into the price of gold an expecation of a big physical sale of gold by the IMF.  If that's the case, then the market price already reflects the very well telegraphed and highly publicized event.

If it is the case that countries like the U.S. - with large gold pledge requirements and suspected reduced bullion stock on hand - decide to settle their gold pledge requirements with cash, then the market price of gold may actually move a lot higher once the market perceives that there will not be an actual physical sale of gold from the IMF.

This brings us to the question of China and American Barrick.  We know that China, in conjunction with India, has expressed interest in buying ALL of the IMF gold (I posted a link alluding to this several weeks ago).   And several analysts have suggested that the IMF gold sales would help enable Barrick to purchase the large quantities of gold required for them to close out its hedges, for which it just raised $4 billion in equity capital.

Based on  these two points, it is extremely probable that, contrary to the very shallow and ignorant analysis featured on CNBC and various publications and websites (e.g. Jon Nadler at Kitco, who's track record in analyzing the gold is beyond dismal), this official decision by the IMF to sell some of its gold may actually turn out to be extraordinarily bullish for the price of gold.  As Jim Sinclair ( has pointed out on several past occassions in reference to IMF gold sales:

"Selling of gold like this occurs only in bull markets and has historically been useless to stop the price increase. In fact in the 1970s these sales pushed gold higher by facilitating demand from huge interests, and will do so even more so now."  Here's the   link

Sinclair has also pointed out that the last large sale of gold by a Central Bank - the 400 ton sale by the Bank of England in 1999 - 2000, marked the absolute bottom of the bear market in gold and start of the current 8-year run in gold. 

It will be interesting to see how these issues surrounding this sale of gold by the IMF unfolds.  I would point out that China and a few other large buyers of gold now have the expectations of being able to purchase a big quantity of gold from IMF at one price without causing a big spike in the price of gold.  If it's the case that the IMF accepts cash to settle member country gold pledges rather than actually physically selling any gold, expect the price of gold to take off to much higher price levels as large buyers scramble to fulfill expectations that were not met by the IMF.

Either way it is quite clear, at least to me, that this move by the IMF marks the second stage of the great bull market in gold (and silver).


  1. Dave,
    very interesting analysis. I think longer term you are spot on. I see gold and silver really had no reaction thus far as well, so you may be on the right track.

  2. the Pats miss McDaniels directing the offense? I've telling people the Broncos might surprise a bit after what he's done to turnaround the defense.