Obama Administration pushes IMF gold sales through House by tieing it to security bill

The U.S. House of Representatives has passed a bill which included an expanded credit facility for the IMF and effective U.S. approval for the proposed IMF sale of 400 tons of gold.

FUNCHAL, MADEIRA - 

The Obama administration has pushed a bill through the U.S. House of Representatives approving $106 billion in supplemental funding, primarily for the Iraq and Afghanistan 'security' efforts, but attached to it was also an expanded credit facility for the International Monetary Fund (IMF) of a massive $108 billion which included an agreement to allow U.S,. members of the IMF Board to agree the proposed $13 billion sale of 400 tons of IMF gold to shore up its finances. 

In theory the US. approval of the IMF gold sale, which still has to pass through the U.S. Senate would be the final hurdle in the gold sale actually going ahead.  But despite this there was virtually little or no impact on the gold market.  In part this may be because of scant publicity being given to this part of the funding approval, but also in that firstly the gold market has largely discounted the IMF gold sale anyway, and secondly in that the IMF has said it will dispose of its gold in an orderly manner through a system such as the Central Bank Gold Agreement which limits sales volumes in a given year.  

However the current CBGA runs out in September and there has been no announcement yet of a renewal beyond that date.  Given Central Bank gold sales under the CBGA appear to have dropped sharply over the past year it may be felt there is no longer a necessity for a new Agreement.  Indeed indications are that some major Central Banks, notably the Russian and Chinese ones, as well as some Middle Eastern banks, are likely to increase gold holdings in part in an attempt to diversify reserve dependence away from the U.S. dollar given the mixed views on the greenback's future path due to the huge amounts of money being pumped into the U.S. Economy to try to stave off recession - or even depression. 

In their April Fortis Bank metals monthly, the London based VM Group commented that "There are some good arguments against a CBGA renewal. The original 1999 Agreement arose from a structural weakness in the gold market. Back then, a class of investors (the Central Banks) believed they were massively overweight in gold and wanted to sell; the Central Banks decided to collaborate on a selling programme in order to ensure that they drip-fed gold onto a market that was already very weak. Those conditions are arguably no longer relevant. 

"If there is no renewal of the CBGA, that would send a tremendously bullish signal to the gold price, at a time today when there are many more actors on the buy-side (such as private investors) and an obviously slowing interest to sell. 

"This would boost gold's status as a reserve asset, giving holders greater flexibility in how they bought and sold it. It would also encourage other Central Banks with large forex reserves but little gold (such as China) to buy. After all who wants to buy something for which they need an Agreement in order to re-sell?" 

But back to the U.S. Moves.  Writing in the Wall Street Journal, economist Judy Shelton comments: "The Obama administration went to great lengths to get the IMF its billions. Last week, congressional leaders received a letter that made a firm connection between global economics and global security. "We know from the 1930s that a protracted global economic slump can foster undesirable and unforeseeable reactions to hardship and adversity," it stated. "Financial hardship and poverty breed desperation, which helps terrorist networks to attract new recruits with messages of hate, violence and intolerance." The letter then urged Republicans and Democrats to support the President's request for IMF funding. "We believe that the current instability poses a significant risk to the long-term prosperity and security of the United States." It was signed by Secretary of State Hillary Clinton, National Security Adviser James Jones, and, most notably, Secretary of Defense Robert Gates." 

Shelton's view is that this was an attempt to pressure representatives into voting in favour on the grounds that a well financed IMF might provide a further bulwark against global financial collapse  leading to global instability and would thus be a threat to greater U.S. security.  She questions this both on economic grounds and on whether the IMF is indeed the right vehicle to handle such a policy. 

"Officials concerned about global security are right to recognize that financial instability breeds discontent and fosters social resentment that can challenge ruling interests and topple whole regimes." says Shelton. "The question is whether short-term fixes -- in the form of emergency loans to a flailing government, the sort of assistance the IMF is prepared to offer -- provide a solid foundation for economic growth."

Part of the problem, in Shelton's view, is that the IMF is no longer capable of fulfilling its role of overseeing an international monetary system because, since the end of the Bretton Woods era there is effectively no global monetary system and that all the IMF can offer nowadays is  "the prospect of lurching from one short-term economic fix to the next."

Where does this leave gold?  One would think that overall such moves will end up being long term positive for bullion.  If and when IMF gold sales do hit the market there may be short term adverse consequences, but if this gold is seen to be quickly absorbed (perhaps by Central Banks looking to build gold reserves) then there could be a quick rebound.

Fundamentals don't necessarily look good for gold at the moment, but the gold market is notable for ignoring fundamentals at least in the short term.  It has been retaining its price levels reasonably well in the face of low jewellery demand and a resurgent dollar - both normally very adverse factors.  Investment demand seems to be stable. People are still nervous.  Gold still offers a degree of wealth protection which most other markets do not at this continuing time of economic turmoil.

SUBSCRIBE to Mineweb.com's free daily newsletter now.

Disclaimer

MINEWEB is an interactive publication, with rolling deadlines through each day, commencing in the Sydney morning,  and concluding, 24 hours later,  in the Vancouver evening.  If you believe your side of an issue deserves inclusion, but has failed to meet one of our deadlines, you are invited to notify the Editor in Chief in Johannesburg, and we will include you in our editing and expanding on our stories. Email him at alechogg@gmail.com

Print story      Email story      Subscribe to free newsletter
Related Links ARTILCES:  Obama nominates Nevadan Abbey as U.S. BLM director  Obama Administration tightens the screws on mountaintop coal mining  Obama effect - good for dollar but bad for gold  OTHER PAGES:  POLITICAL ECONOMY EUROPE AND MIDDLE EAST

Back

 

responses to this article

Now is the time for a IMF audit on Gold holdings Now is the time for a IMF audit on Gold holdings by Tony N. on June 19 2009, 11:21 Find this comment inappropriate? Report it

Why did Obama swear to defend the Constitution since he's ignoring it? Justice Joseph Story had noted that the general welfare clause was not to be used as an excuse to justify aids and subsidies to foreign entities. "If the tax be not proposed for the common defence, or general welfare, but for other objects, . .more wholly extraneous, (as for instance, for propagating Mahometanism among the Turks, **or giving aids and subsidies to a foreign nation** (emphasis added), to build palaces for its kings, or erect monuments to its heroes,) **it would be wholly indefensible upon constitutional principles** (emphasis added)." --Justice Joseph Story, Commentaries on the Constitution 2 (1833) http://press-pubs.uchicago.edu/founders/documents/a1_8_1s28.html . .less by B. Johnson on June 19 2009, 15:50 Find this comment inappropriate? Report it

GOLD This is all to have the physical gold to cover the short positions out there at the "crimex" (comex). How can anyone with a straight face say they are going to flood the market with gold, kill the demand off so no one knows it's real worth and there . .more isn't a fail to deliver that bankrupts the dollar, and then say it should be good for it? UNBELIEVABLE!!! . .less by PAUL WOT on June 20 2009, 11:50 Find this comment inappropriate? Report it

$$$$$$$$ Report say 400 tons 400 X 2000 = 800,000 lbs 800,000 X 16 = 12,800,000 ounces 12,800,000 X $934.00 = $11,955,200,000 Isn't that about a billion short of the sale price? or are they expecting gold to increase 8-12% . .more ? And how would selling physical gold for "paper" shore up your finances? . .less by paul wot on June 20 2009, 12:02 Find this comment inappropriate? Report it

RE CALCULATE when that much huge quantity is unloaded then the price will come down . 12,800, 000 x ? by DINESH BOORUGU on June 20 2009, 13:01 Find this comment inappropriate? Report it

dumb you aren't calculating the correct ounce. Gold is in troy ounce which 31.1 grams per ounce. the ounce you calculated is 28 grams per ounce. there is the difference by hansen on June 20 2009, 16:14 Find this comment inappropriate? Report it

Close Fort Knox This will save us some money. We will no longer have to keep Fort Knox open. Obama can close it just like Guantanamo. Sell the gold to cover the big spending. Break the country of any chance of recovery or a reliable currency. Now the bankers really . .more have enslaved us. Debt is the money of slaves. Gold is the money of Kings. When the price drops, I will buy and so will anyone who can see the future. . .less by joe on June 20 2009, 16:52 Find this comment inappropriate? Report it

IMF Sale Price According to the IMF.org website, the set reserve bid begins at $850.00. China wants it all and has set a buy price. But, who knows at what level? They (China) have the enough paper to spend to their hearts content in buying the entire 400 . .more tonnes. This sale was probably a key discussion during Geithners visit to China, timed around the long bond auction; and based on the Fed buying its' own debt, it's obvious that China would rather have the Gold. India is also a big contender for the IMF sale, again to offload some U.S. debt, but the BRIC meeting held after the inauguration recently in Russia, it is unlikely a problem as to which of the BRIC nations buys the Gold. . .less by Maxwell on June 21 2009, 03:22 Find this comment inappropriate? Report it

China Yellow If the BRIC nations buy all of 400 tonnes, the signal will be clear that the USD is being phased out of the reserve currency status. China has acted like a "Bull in the Gold closet" for the past decade with respect to buying Gold; and this was no . .more accident. They have several hundred years of trading experience. They have not pegged the Yuan to any specific reserve and what a smart play that has turned out to be. Look for China to become a major player in the mining stocks. If by some act of failed investor psychology, a sell off occurs and the price is driven down to a buy level, we know what to do. Note: Always use a back brace when moving large quantities of Gold. Better to use a forklift than a wheel barrow. Safety first! . .less by Maxwell on June 21 2009, 03:37 Find this comment inappropriate? Report it

Name
Subject
Comment