St. LOUIS (ResourceInvestor.com) — An esteemed group of eminent persons, including former Fed Chairman Alan Greenspan and current President of the European Central Bank Claude Trichet, has recommended that the International Monetary Fund (IMF) sell up to 400 tonnes of gold as means to finance ongoing costs.
In a report submitted to the IMF Executive Board today, a Committee of Eminent Persons concluded that the IMF’s current income model, which relies heavily on the interest it earns from loans to member nations, is “no longer appropriate.”
The fund forecasts a loss of about $102 million this fiscal year after countries including Brazil and Argentina repaid loans early. The committee suggests a new set of revenue measures to avoid such occurrences with gold sales a part of the package.
The IMF currently holds 103.4 million ounces (3,217 tonnes) of gold. If it were to sell 400 tonnes, the Fund would gain about $6.6 billion in revenue. Investment of the proceeds would yield approximately $195 million per year, assuming a real rate of return of 3%, according to the committee.
Conny Lotze, spokesperson for IMF Media Relations, told Resource Investor that these are just recommendations on how the Fund can finance its administrative costs in the long term, “including through an endowment funded through limited gold sales.”
“This will now be discussed by the IMF’s 185 member countries and they will need to find consensus on a new income model, which may not include gold sales at all in the end. So it’s an ongoing process,” she said.
A set of formal proposals will be submitted to the Executive Board in the next months and a progress report will be provided to the International Monetary and Financial Committee during its meeting in April 2007.
Jon Nadler, analysts for Kitco.com, says this is “not a done deal.” He said previously floated proposals to sell gold for debt relief were met with resistance by numerous organizations, including the World Gold Council.
“In a study carried out for a past G-8 meeting, the World Gold Council said that, while the sale of IMF reserves would yield $120 million annually, export earnings of affected HIPC countries would fall by $60 million annually if the gold price fell by just $10,” he said.
The committee said the gold sales should be “ring-fenced” to exclude further sales and subject to strong safeguards to avoid causing “disturbances” to the functioning of the gold market. Accordingly, the sales should be coordinated with current and future central bank gold agreements “so as not to add to the volume of sales from official sources.”
However, it would appear that central banks consistent with the Central Bank Gold Agreement (CBGA) of 27 September 2004, also known as the Washington Agreement, are on pace to miss the 500-tonne quota again this year. Although sources differ on how much was sold last year, RI has it at about 370 tonnes.
In the week ending 26 January 2007, the European Central Bank reported gold sales amounted to EUR 36 million, or roughly 2.3 tonnes. So far in the 2006-2007 CBGA year, central banks have sold about 94 tonnes in 4 months with 8 months remaining.
This puts average monthly sales of about 23 tonnes, which means that signatory banks would have to sell an average of about 50 tonnes per month for the remaining months to hit the 500-tonne quota.
Dennis Gartman, editor of the Gartman Letter, said in today’s update that central banks would have to sell 9.6 tonnes of gold each and every week in order to meet the 500-tonne quota, “and they are falling more and more behind the schedule.”
“That leads us to conclude either that some enormous selling lies ahead or, more plausibly, that the banks have sold what they want and are reducing their efforts,” said Gartman. “If the latter is correct, it is rather enormously positive for gold going forward.”
In addition to Greenspan and Trichet, four other central bank chiefs chaired the committee: Tito Mboweni, Governor of the South African Reserve Bank; Guillermo Ortiz, Governor of the Bank of Mexico; Hamad Al-Sayari, Governor of the Saudi Arabian Monetary Agency; and Zhou Xiaochuan, Governor of the People’s Bank of China.
“Our perception is that aside from the initial psychological impact on prices, which is still a possibility, the market could well digest the tonnage in an era when private investment around the world is willing and able to consume about 105 tonnes per month,” concluded Nadler.
February gold futures climbed $7.80 today to close at $652 an ounce on the New York Mercantile Exchange. So far this year, gold is up 2.2% after rising 24% last year.
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