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

Is this an attempt to suppress the price of gold, sheer stupidity, or something else? While you are pondering the question please consider Obama Administration pushes IMF gold sales through House by tieing it to security bill.

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.

Gold Role In The IMF

Please consider Gold in the IMF.

The IMF holds 103.4 million ounces (3,217 metric tons) of gold at designated depositories. The IMF’s total gold holdings are valued on its balance sheet at SDR 5.9 billion (about $8.7 billion) on the basis of historical cost. As of March 31, 2009, the IMF’s holdings amounted to $94.8 billion (at then current market prices).

The Articles of Agreement now limit the use of gold in the IMF’s operations and transactions. The IMF may sell gold outright on the basis of prevailing market prices, and may accept gold in the discharge of a member’s obligations at an agreed price, based on market prices at the time of acceptance. These transactions in gold require an 85 percent majority of total voting power. 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.

Some may think that the IMF dumping gold is part of the vast conspiracy to suppress the price of gold. Instead, I propose the IMF sale of gold is sheer stupidity on the part of the IMF. However, given that I do not like the IMF or its meddling, I am glad they are doing it.

Reasons To Cheer IMF Gold Sales

1) If the IMF wants to dump gold in favor of paper assets diminishing in value over time, it’s fine by me. I hope they dump it all. It will reduce the amount of meddling they can do down the road.

2) IMF gold sales are a bull market phenomenon. The UK dumping gold at $250 marked the bottom.

3) China is a possible recipient of the gold. If the real reason for this move is to allow China to get rid of some US dollars or treasuries in return for gold I view that as good thing.

Bretton Woods II is coming to an end. That we know. What we do not know is the timeframe or the replacement. However, China may need to accumulate gold for whatever the next agreement might be. IMF gold sales may be a small step down that path.

Gold is consolidating recent gains now. Bear in mind that March to August is generally a seasonally unfavorable period. That is not a prediction of a further pullback, although it is likely. Further consolidation is a good thing that will add fuel for the next leg higher.

Mike “Mish” Shedlock
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