As I wrote in late March, the price of gold declined going into the G-20 meeting April 2. It has continued to decline since then in large part because the specter of International Monetary Fund gold reserves possibly being sold into the market.
Supposedly, the IMF would be selling 403 tons (just under 13 million troy ounces) of its gold holdings to fund efforts to resolve the global financial crisis. In all likelihood, this gold will never be sold or, if it is, will be completely sold to a single central bank.
To understand why the threat to sell IMF gold is almost certainly a scam to knock down the price of gold, you need to understand more background information than I can provide in this column. But let me give you a few tidbits.
The gold reserves of the IMF were created mostly from pledges from the organization’s initial members. In theory, the gold is supposedly stored in four countries, including the United States and United Kingdom. However, the existence of and title to these gold reserves has never been audited in the organization’s history.
Under past IMF accounting standards, where a central bank leased gold to another central bank, both banks were required to report the same gold as being held in both of their vaults! For the past two years, the IMF has requested, but not required, that central banks break down their information on gold reserves between what is held in their own vaults, and what has been leased and is no longer in the vaults. There has been little adoption of this more accurate standard. The United States especially has not complied with the new standard.
Earlier in this decade, the IMF threatened to sell 403 tons of gold reserves in order to fund financial aid to poor nations. No gold was ever sold.
Last year, the IMF announced that it would sell 403 tons of gold reserves to establish an endowment fund to generate income to cover growing IMF operating deficits. No gold was ever sold.
The IMF does not have the authority to sell any gold unless it gains the approval of 85 percent of its voting members. The United States has 17 percent of the voting power of the IMF, which gives the U.S. government veto power over any IMF gold sale.
In order for the U.S. government to approve any IMF gold sale, Congress would have to pass legislation. There has yet to be any legislation proposed in Congress for any of these supposed sales of IMF gold, despite that fact that the U.S. Treasury specifically announced in February 2008 that it would seek such legislation.
In a letter to Chris Powell, the Secretary-Treasurer of the Gold Anti-Trust Action Committee (GATA), in November 2008, an IMF official stated, “Members include their reserve position in the IMF in their international reserves.” In other words, the same gold is reported in IMF reserves and in each country’s reserves.
As a consequence of all of these and other deceptive accounting standards, it simply is not possible to verify that the IMF would even be able to sell 403 tons of gold if authorized to do so.
Even if the IMF had and was authorized to sell 403 tons of gold, the IMF is committed to abide by the spirit of the Central Bank Gold Agreement which limits central bank sales of signatory members to 500 tons per fiscal year. In the fiscal year ended September 2008, only 357 tons were sold by central banks under this agreement. Were the IMF to try to sell all 403 tons in less than two or three years, it is likely that other central banks would be required to reduce their gold sales.
Now, assume for a moment that the IMF were to actually sell these 403 tons of gold, what would it matter? At current gold prices that comes to less than $12 billion. In the current financial crises, the U.S. government has now committed to more than $13 trillion in various packages, more than 1,000 times the value of the gold that the IMF is pretending it could sell.
Also, the Chinese government has indicated that it is seriously considering adding more than 4,000 tons of gold to its reserves. Probably the main reason it has not already done so is the lack of available physical gold to purchase.
On April 2, British Treasury Minister Stephen Timms tried to claim that the newest call for IMF gold sales would somehow represent an increase over former announcements, “What’s referred to here is in addition to what has been noted previously.” The price of gold fell $40 in the next 24 hours. After that happened, on the afternoon of April 3, IMF spokesman William Murray stated, “The gold sales apply only to those amounts already agreed and announced previously by the IMF.” By that time, however, gold had successfully been knocked down through several major sell stop points, which added to the continued decline we have seen early this week.
Last week’s furor over potential IMF gold sales was not something proposed or approved by the IMF. Instead it was the work of the U.S .and British governments, acting through the cover of the G-20 meeting. It seems obvious to me that the only purpose for which this, so far, mythical IMF gold sale was mentioned was to knock down the price of gold in the face of the total failure of the G-20 meeting to address global financial crises.
The trend following the repeated past announcements that the IMF was considering selling its gold has been for the price dips to be smaller and to have a shorter effect. I expect this trend to continue this time around.
Other significant developments:
Starting April 2, when the spot price of gold dipped below $901, traders in India began buying gold from their Swiss sources to be imported into the country. India, the world’s largest gold consuming nation, had experienced a slump in demand after the world spot price rose above $900. For the past several months, gold has traded in India for less than the global price. Starting last Thursday, gold has been trading in India above the global price.
On April 3, William K. Black was interviewed on the Bill Moyers Journal television program. Black was a senior federal regulator during the savings and loan crisis in the 1980s. He blew the whistle on the Keating Five, the U.S. senators implicated for taking gifts from Charles Keating, a savings and loan banker who was convicted of federal and state charges of fraud and racketeering. Here are some extra juicy parts of the interview:
MOYERS: Are you saying that Timothy Geithner, the secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover-up to keep us from knowing what went wrong?
MOYERS: You are?
BLACK: Absolutely, because they are scared to death. All right? They’re scared to death of a collapse. They’re afraid that if they admit the truth, that many of the large banks are insolvent. They think
Americans are a bunch of cowards and that we’ll run screaming for the exits.
In terms of physical gold and silver demand, the lower prices of the past few days have sparked a new round of demand. The U.S. Mint has not been able to cope with demand for gold and silver American Eagles, with the result that premiums are still higher than in years past. Expect to pay $75-100 above spot for gold Eagles, if you can find any. Large orders of silver Eagles will probably cost you $4-$5 above spot.
Many other forms of physical gold and silver products have actually fallen in the past few weeks. Other bullion producing mints around the world have ramped up production to try to cope with demand. You can purchase Canada gold Maple Leaves for around $50-$70 over spot. Alternative gold choices like Mexico 50 pesos, 1 ounce ingots, Austrian 100 coronas, and American Arts Gold Medallions can be acquired even closer to spot price. Smaller size physical gold issues are virtually impossible to locate. It is possible that the South Africa Mint may resume production of tenth-ounce Krugerrands to meet the demand for small gold coins that is not being satisfied by other mints.
In physical silver products, fabricators of ingots are starting to catch up to demand. Expect to pay $1.25 to $2 or so above spot to purchase 100-, 10- and 1-ounce bars. It is even possible to order 1-ounce rounds for delivery in less than four weeks. Canada Silver Maple Leaves are flowing onto the market again and cost less than silver Eagles. U.S. 90 percent silver is in ready supply, but still costs around 20 percent above metal value.
I personally think that gold prices under $900 and silver prices under $13 represent a temporary gift, courtesy of the U.S. government. I do not expect them to last long.
Pat Heller owns Liberty Coin Company of Lansing, Mich., and writes weekly for the Internet newsletter “Market Update.” Visit www.NumisMaster.com to sign up for the free newsletter.