Will IMF gold sale hit bullion market?

February 12, 2009

Commodity Online
NEW DELHI: With the International Monetary Fund (IMF), the third largest official holder of gold, all set to sell around 400 tonnes of gold to fund changes to its financing base, the bullion market is set to witness a flurry of activities in the coming months.

Even though there were speculations about IMF’s going ahead with the plan, this week the fund clarified that it does not intend to alter plans to sell over 400 tonnes of gold.

According to IMF, a recent surge in IMF lending to countries facing balance of payments crises related to the global economic slowdown and financial turmoil has led analysts to question whether the Washington-based institution will proceed with the plan.

The sale is expected to hit the gold price, which is at the peak now. Following the recession, gold prices have soared to new heights as safe haven buyings increased.

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The existing Central Bank Gold Agreement, which limits gold sales by central banks to ensure the market is not flooded with bullion, is in its final year and is due to expire in September.

Official gold sales, reported and unreported, through mid-February may be closer to 135 tonnes. With just over seven months to go in the agreement year for the IMF, this puts sales under 300 tonnes — well below the 500 tonne mark.

So, there is an argument that even if the IMF gold sales are approved, the IMF gold would be offset by the shortfall in European gold sales.

The package of IMF governance reforms, including gold sales, was submitted to the US Congress last November, but will need to be reintroduced as a formality.

The IMF agreed in May last year to create an endowment with the profits from the proposed sale of the gold as part of a broader makeover of the IMF’s financial structure and investment strategy.

Such a move, however, depends on approval by member countries’ legislatures, including the US Congress.

The sale of 403.3 tonnes of gold was originally proposed in 2007 after a committee chaired by Andrew Crockett recommended the IMF adopt a new funding model.

The IMF said on its website its finances had become unsustainable after a decline in its lending business.

With more countries now seeking IMF assistance to ward off the effects of the global financial crisis, there is speculation that as this business picks up, it will roll back its plans to sell bullion.

The fund has said that sales would be made under the umbrella of a central bank gold agreement to avoid disruption to the market.

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