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Worth thinking about?

The gold bugs are actively dissecting the news that the International Monetary Fund appears to be in the process of making a decision to sell 12.9 million ounces of gold bullion.

Created in 1944 by the Bretton Woods treaty, the purpose of the IMF was originally to help member countries keep their exchange rates fixed by helping keep their trade accounts balanced.

This help ranged from advice to loans. Nowadays, where exchange rates are floating and nationalism has caused countries to resent or resist any advice that runs counter to prevailing political passions, the IMF has lost much of its original purpose. It does still lend money and the purpose of the gold sale is to raise some additional lendable funds.

What will the extra supply hitting the market do to the price of gold? Not very much, I would think. As long as the Federal Reserve continues to rapidly increase the American money supply, inflation will be a problem and individuals who want a hedge against it will continue to buy gold.

It pays to keep in mind that 12.9 million ounces is less than $13 billion. The American money supply, measured at its most basic level, currency in circulation, is nearly $1 trillion and annual economic output is about $14 trillion. This doesn’t even take into account the rest of the world.

Put in that light, it is hard to imagine the market having any difficulty absorbing the gold.

There are good reasons to buy or sell gold. The IMF’s possible gold bullion sale should not affect any of them.

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One Response to Worth thinking about?

  1. Scott Barman says:

    The only problem is with the price of gold. Now that the dollar has been beaten down against every currency, gold becomes the tangible asset to help prop up the money markets. Gold is $958 and Silver is $19.17 as I type this. It is worth more to those holding Euros and British Pounds than it does in dollars. All this gold will go to enrich the world leaving the broken US economy to suffer… at least until 1/20/09!

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