"Gold falls on IMF sales concerns," read a headline at the BBC news page. The IMF has about 3,217 tonnes of gold. Why would it sell it? "By revaluing its holdings, the IMF may be able to sell billions of dollars of gold and use the cash to cancel debts owed by the world's poorest nations," the BBC explains.
"The plan was put forward by G7 finance ministers over the weekend. The price of gold fell to $413.50 an ounce in Asia, before rebounding slightly in early European trading," the article reads.
Hey wait...$413? Isn't gold trading at $908.80?
Yes. Of course it is. That BBC article was written in 2005. For whatever reason, whenever the gold price hits some technical resistance, someone trots out the idea of central bank or IMF sales to swamp the market and keep the gold price down.
Keep in mind central banks and the IMF have about 28,500 thousand tonnes of gold. Private investors have about 128,000 tonnes. The idea, then, that central banks can flood the market with gold and depress the price is a bit rich. Gold manipulation is far more complex.
Still, it might make sense for the IMF. The funds spends about $1 billion a year in loans to the developing world and only makes about $600 million in loan repayments (talk about a bad business.) The market value of the 103 million ounces of IMF gold is considerably higher today (about $92 billion) than it was five years ago ($23 billion.)
What's more, the plan floated at last weekend's G7 meeting was to sell just 400 tonnes of IMF gold, or about 12.9 million ounces. That would generate about $11.5 billion in revenue at an average gold price of $900.
Granted, lending to the developing world is a bad business. But you have to assume the IMF would not flood the market with gold, only to lower gold prices and the money the fund would receive from any planned gold sales, not to mention lowering the value of the rest of its gold.
We think it's safe to assume that when you factor in declining gold production in South Africa, the addition of 400 tonnes of IMF gold on to the market is not going to crash the gold price. It probably just means gold ETFs can increase their holdings from 630 million tonnes to somewhere near 1,000.
What exactly is going on in South Africa? We know the state power company, Eskom, has called for a 10% reduction in industrial and commercial usage indefinitely. It says the rationing of electricity may not be far off, and that the crisis will last at least six months.
Coal stockpiles to run South Africa's generating facilities are low. And in the mining industry, a 10% reduction in power means a 20% reduction in output owing to all the systems (ventilation, pumping) that must be in operation for a mine to operate. Platinum group metals, of which South Africa is a major producer, should continue to benefit. But what in the world will happen to South Africa as an economy and a country? See the recent e-mail we posted from our friend Jim Kunstler for the answer.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by John on 14 February 2008:
"Keep in mind central banks and the IMF have about 28,500 thousand tonnes of gold"
My understanding is that there hasn't been an actual audit of this stuff for decades, at least in the US. For all we know, the Fed could've been selling gold year after year in an attempt to hide the real inflation numbers.
Comment by mike on 14 February 2008:
....the dumb lumps of metal in the old gizer's pan look suspiciously like a map of australia....cm'on guys...what're ya hiding.....
Comment by John on 14 February 2008:
Mike,
If you look closely enough, you can see the face of Jesus in there.