The International Monetary Fund has thrown a measure of uncertainty back into the gold market. Faced with a budget shortfall of about $140 million for the fiscal year ending this month, the IMF plans to sell an eighth of its gold reserves, or about 403 tons, to fill in its budget deficit and reform its bloated structure.
The sale amounts to 12 percent of the IMF’s gold reserves. According to Asia Business News (ABN), it could yield around $11 billion, which would help support the financial reorganization of the IMF as it looks to surmount a downturn in lending to troubled countries, its main income source.
IMF Managing Director Dominique Strauss-Kahn said in a statement that the IMF would use the funds to help shore up IMF finances and create a new $6 billion endowment with more diverse investments to generate income.
The sale still requires approval by Congress before the U.S. executive director of the IMF can vote in favor of the gold sales. According to Britain’s Telegraph, the Bush administration has backed the plan as part of the broader overhaul of the IMF. But it’s still unclear whether there is enough support in Congress to carry the measure.
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HSBC gold expert James Steel told the Telegraph that Congress can effectively block the gold sale. The U.S. holds 17 percent of the IMF’s votes, and any major change requires a super-majority of 85 percent.
"A number of senators representing mining states may not look too favorably on this,” he told the newspaper.
The IMF assured that, "If approved, gold sales would be conducted in a transparent manner with strong safeguards to ensure that they do not add to official sales and avoid any risk of market disruption.”
The IMF also said the sale would take place over several years and would be part of an existing agreement that limits central bank sales to 500 tons a year.
According to the World Gold Council, about one-fifth of the world’s mined gold is held as reserves by central banks.
Futures prices traded around $926 an ounce on April 8. That compares to a record high reached in March of $1,030 an ounce when the Federal Reserve slashing interest rates, but it’s still up from the recent low of $US888 an ounce. Gold futures prices eased to around $US918 in U.S. trading overnight.
Ross Norman, director of thebulliondesk.com told the Telegraph that the IMF sales were discounted long ago and were not likely to have any major impact.
"The markets can easily cope with this amount of extra gold. There’s a global shortage because mines are not producing enough,” he said.
"Gold is still up by over 50 percent since we all learned the meaning of the word ‘subprime’. It is perfectly healthy to have a breather now. The correction may have further to run because we have not yet flushed out the speculative positions,” Norman added.
RBC Capital Markets agreed that the IMF's gold sales "is already priced into the market."
RBC observed that, "While gold will likely consolidate at lower levels, analysts do think it will make another run at US$1,000 per ounce later in 2008."
It recommended investors consider buying at lower levels in June and July "since there should be a rebound in the gold price in September and October."
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