Tuesday, April 08, 2008

About IMF Gold Sales

So the IMF has decided to sell of 403 tonnes out of the 3217 tonnes it has in gold reserves. 403 tonnes is equivalent to 14.2 million ounces, which at current market prices is worth roughly $13 billion.

The reason given for this move is that it will generate new income. That really doesn't make much sense. If they by income mean return, then selling gold is a bad idea since gold is likely continue to rise, and rise at a lot faster pace than at current interest rates. If they by income mean liquidity, then it is slightly more understandable, but it would really because of the aforementioned factor be more rational for them to borrow using the gold as collateral. But then again, since I am not a friend of the IMF, I don't mind if they make bad investment choices.

What effect will this have on the gold market? Will it lower the gold price? Certainly, at least in the short term. Will it end the gold bull market? No, it won't. The fundamentals supporting the gold bull market, primarily the habit of central banks in general and the Fed in particular to debase their paper currencies will continue to support gold in terms of these paper currencies, both because of the direct effect of lowering the value of the paper currencies, but more importantly because it supports the demand for gold as an inflation hedge. Also, the preference for gold in many emerging economies, particularly India, as jewelry, implies that demand for gold as jewelry will continue to increase as these economies continue to grow.

It is unclear exactly during which period of time that IMF will sell the gold, as the IMF only says they will sell it in a "non-disruptive" manner. Presumably, this means that they will sell it gradually during an extended period, perhaps one or two years. This will depress gold during that period somewhat and limit the gains, but not by enough to stop gold from continuing to climb and within a relatively near future, regain the $1000 per ounce level.

0 Comments:

Post a Comment

<< Home