The Rest of the IMF Gold

On September 18, 2009, the IMF Executive Board approved the sale of 403.3 metric tons of gold (12.97 million ounces), which amounts to one-eighth of the Fund’s total holdings of gold. As you know the IMF sold 200 tonnes of this gold to the Reserve Bank of India and announced the sale on Tuesday. That leaves 203.3 tonnes still available to the IMF members.

When the sale was announced I, and I believe most folks interested in these things, expected a large purchase by the Chinese central bank The Peoples Bank of China (PBC). This made sense for several reasons.

First is the recent action by the The Hong Kong Monetary Authority, which functions as the territory’s unofficial central bank. It announced that it will transfer its gold reserves stored in other vaults mainly in London to it’s recently constructed depository later this year. The monetary authority reported $63 million in physical gold reserves as of July 31, according to its International Reserves and Foreign Currency Liquidity statement. This move was seen as an attempt to make Hong Kong a regional hub where the metal could be traded. As de facto overseers to the territory the PRC would have great influence on the activities of the hub and in the trading of gold in the region.

Second is the PRC only holds Gold reserves of 1159.4 tonnes or $40.47 billion and is 6th in the world in terms of gold reserves.
At 1159.4 tons, one might expect the world’s most heavily populated country to hold more in the way of gold reserves. China’s gold only accounts for 1.9% of its foreign reserves compared to an estimated $2.2 trillion in USD. With a population of 1.3 billion, China holds about $30 worth of gold per person compared to $1690 in US treasuries and currency.

Third is the recent comments made by Chinese officials that the PRC would like to change the allocation of their foreign reserves out of the USD. While the amount of the IMF gold was comparatively small as a percentage of the PRC’s foreign reserves it would still be a move towards their stated goal, and it would not be seen as an overt move against the dollar.

The only other country I saw as being a candidate for a large off market purchase was Russia. Although in my opinion considerably less likely than the PRC there is a case to be made for them.

First is the recent comments by some Russian officials that can be viewed as US dollar negative to one degree or another. Both outright statements that they were considering reducing their reserves of US currency and Treasuries, and statements indicating a position that US dollar denominated commodities be transacted in a different currency or basket of currencies.

Second, Russia has the tenth largest gold reserve, and is the fifth largest gold producer in the world with 568.4 tonnes of gold, valued at $21.1 billion and comprising 4.3% of the country’s foreign reserves. Last year Russia reversed five straight years of production declines with a 13% increase. In the first seven months of 2009 Russia increased its gold production by 21.1%, due in part to the launch of several new mines. This comes just in time for a country that has struggled mightily with recessionary pressures.

Third and much more difficult to quantify, the Russian government has in it’s actions and statements, indicated a desire to recover it’s position in the world lost in the fall of the Soviet Union. Taking a US dollar negative position at the same time as fortifying it’s foreign reserve base may be seen as both a sensible economic policy and a political statement aimed at the US.

There are of course counter arguments to these statements that come to mind, and no doubt others I haven’t considered.
One is the obvious effect on the dollar this would have, and how that would effect the much larger position both Russia and the PRC have in it. It would undoubtedly be a more negative effect on the value of their reserves in total if the value of a little gold went up and the value of a lot of dollars went down. The only counter I have to that is they may feel the dollar is going to go down in value anyway.
Two is the unknown effect on relations with the US. In the current environment, given the value of the transaction, I see this as negligible in and of itself, but may contribute negatively to relations.

Other Scenarios are also possible. The IMF may simply sell smaller amounts to the other member nations, or to member banks. While this would not have the gravitas of a big sovereign buying another large block, if it occurs quickly and is transacted in dollars it could have a similar effect of lesser magnitude.

I think there is enough likelihood in one of the two sovereigns mentioned here making a large purchase, and the limited downside risk if they don’t, to take a position based on the assumption. I am in positions now that benefit from the devaluation of the dollar, and the rise in the price of gold. I am going to add to my long gold positions at or near $1090 and evaluate adding dollar negative currency positions.

Disclaimer
The author and The Wallingford Trust hold long or short positions or may hold positions in the future in the following:
CL_F And other Gold Futures, Physical Gold Bullion, ZGZ9 and other Crude Oil futures, DXZ9 and other US Dollar Index Futures, ZBZ9 and other 30yr Treasury futures, CVX, XOM, TBT, FPP

References
Gold in the IMF – IMF Factsheet
The Hong Kong Monetary Authority
China Takes Aim at Dollar – Wall Street Journal Article
IMF official says U.S. dollar reserve status to stay – Reuters
The Russian Economy and Russian Power – Stratfor Global Intelligence

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