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IMF vs. Central Bank Gold Sales

Could central bank gold sales slow by 400 tonnes as the IMF sells gold to repair its balancesheet...?

WHEN THE US Treasury said this week it will support the sale of 400 tonnes of IMF gold, everyone seemed surprised, writes Julian Phillips of the Gold Forecaster.

   But here at, we realized that Congress would still have to be asked to approve the sale. When the mist cleared and we saw in sharp focus what lay ahead, we also realized that much more needed to be done before the sales became a reality.

  • The IMF must trim their staff by 15% under the new budget agreement. This is not a quick action;
  • The gold sales must get the approval of the US Congress, an approval that was denied them in the past;
  • The sales must then get the approval of 85% of the IMF's voting members, and the United States accounts for 17% of the votes. That means another 68% of members must vote in favor;
  • Their are strict procedures to be followed in any IMF gold sale (more below).

   Should these obstacles be overcome at some point in the future, the proceeds would then be used to finance an expected income gap in this fiscal year of about $224 million, with the balance placed in a fund from which the income can be used to fund the International Monetary Fund's overheads.

IMF Gold Sales: What Type of Sales?

The Second Amendment to the Articles of Agreement in April 1978 require that the IMF, when dealing in gold:

  1. Must avoid managing its price or establishing a fixed Gold Price;
  2. May sell gold outright on the basis of prevailing market prices, or accept gold in the discharge of a member's obligations at an agreed price, based on Gold Market prices at the time of acceptance;
  3. The IMF does not have the authority to engage in any other gold transactions – such as loans, leases, swaps, or use of gold as collateral – nor does it have the authority to Buy Gold for itself;
  4. The Fund also has a systemic responsibility to avoid causing disruptions to the functioning of the Gold Market;
  5. Profits from any gold sales should be used whenever feasible to create an investment fund, of which only the income should be used.

   How would the IMF now achieve all these criteria? It is thought that the IMF will only sell to another central bank (with China widely – if not wildly – cited). But we don't see any such stipulation in their Articles, even if it is one of their options.

   In the past they have used the auction method of selling gold (taking the highest offered price), but again this is not stipulated in their Articles. They also have the right to choose one or more bidders at this price.

IMF Gold Sales: The Central Bank Gold Agreement

   Perhaps the most important, if somewhat vague statement coming from the IMF at the end of the January meeting was that "the [gold] sale should take place within the existing Central Bank Gold Agreement, that is to say it would not be additional to sales already programmed by central banks, but would be accommodated by reductions in the amounts of gold that the central banks might sell under the Central Bank Gold Agreement.

   "We have [also] emphasized that the sale should be undertaken in a very careful way in terms of their periodicity amounts and manner of sale such as not to disturb the market."

   The Central Bank Gold Agreement (CBGA), first signed by 15 European central banks in 1999 and extended for a further five years in 2004, limits their annual gold sales – and always on the open market – to no more than 500 tonnes a year. So we sat and stared at the IMF statement above for a while, making sure the words did actually mean what they said and were not the writer's mistake.

   But there it is, no mistake!

   The IMF is saying that its gold sales would be "accommodated by REDUCTIONS in the amount of gold that the central banks might [otherwise] sell under the Central Bank Gold Agreement." Net-net, in short, the impact of the IMF gold would be zero compared with what's already scheduled (or at least permitted) under the CBGA.

   By our reckoning there are only 537 tonnes or so of the CBGA's "announced sales" left to go, plus a possible Spanish 100 tonnes of "unannounced sales". If we interpret the IMF's words correctly, the 400 tonnes it wants to sell would replace 400 of these expected and possible tonnes, leaving the signatories to the agreement possibly selling another 139 tonnes of "announced sales" and 100 tonnes of "unannounced sales" over the next 19 months.

   Perhaps this is why the sales pace under the agreement has slowed down so much? Bear in mind the IMF proposed sales, if it can hurdle the remaining obstacles, may be some time away still. There's no hurry for the signatories to sell the little left, so they can afford to wait still.

How Would the IMF Gold Sales Affect the Gold Price?

   Perhaps these obstacles can be overcome by 26th Sept. 2008, the end of the current year of the CBGA, at which point these proposed sales – were they to occur – would come over the next year. With the statement above from the IMF we see that the full compliment of gold sales from the CBGA will not be met by the central banks themselves, and will in fact fall to around 239 tonnes over the next 19 months.

   Add the 400 tonnes of IMF gold back in, and yes – the total amount rises to the ceiling of the CBGA limit again. But the amount to sell over 19 months remains the same (plus that potential 100 tonnes from Spain), coming in at only 8.4 tonnes per week.

   And that's assuming the central banks will indeed sell what they have announced. In short:

  • The 'ceiling' of 500 tonnes ensures that all "Official" sales will not affect the Gold Price;
  • The I.M.F. have said they will not disturb the Gold Price;
  • Lower sales than the "ceiling' of 500 tonnes would actually spur the Gold Price higher still;
  • And against this positive picture, all the sales of the European Central Bank in the past (under the "Washington Agreement" of 2000-04 and the Central Bank Gold Agreement of 2005-09) have not prevented the Gold Price from nearly quadrupling.

   All told, this is extremely positive for anyone Buying Gold right now!

IMF Gold Sales: What About Auction?
   If the IMF went instead to sell its gold by auction, it would simply be an open invitation to Russia or China or another Eastern central bank to bid in the knowledge that they will get Gold Bullion without driving up the price.

   Once the price achieved is reported – which it must be – then the bid for gold from emerging economy governments would spur the open-market Gold Price higher again. And add to this the fact that the sales will be limited to 400 tonnes, removing the so-called central bank gold sales "overhang" from the market.

   It is clear that there is a spirit, quite rightly, within "Official Circles" that does not like to further gold sales. Because if they sell direct to a central bank, then their attempts to abandon the use of gold in the monetary system will in reality – if not in theory – be undermined. This can only be another positive for the Gold Price.

   Indeed, any which way you look at it, these potential IMF gold sales – if they come to pass – will in reality have a positive impact on the bull market in gold. For the entire report, please visit the

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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