 IMF Gold Sales -
24 reasons why it will be a non event
Kenneth J. Gerbino
Archives
Kenneth J.
Gerbino & Company
Investment
Management
February 14, 2005
IMF bureaucrats want to sell
some of the IMF gold reserves and use it to give poor nations
debt relief. This seems like a negative for gold, but it is a
scheme that will not happen and should be understood by mining
professionals and investors as to why.
Gold investors should realize
that Central Bank and IMF gold sales are already factored in
and discounted by the gold market and have been for the last
40 years. This has been a constant and long-term discount and
it has always been in the market. If all the official gold were
not in the hands of these government institutions gold would
most likely already be trading at over $750 an ounce.
The government of South Africa
will not allow in the world of public opinion their most important
industry to be once again rocked by any gold sales or "dumping"
for political reason that would upset the price of gold, especially
with the Rand so strong.
Black Empowerment Groups in
South Africa which now own billions of dollars worth of gold
mining assets will not sit around while a few European bureaucrats
attempt to try and destroy their piece of the South African pie
that they have been fighting for and struggling to attain for
over a century. This group will rally a huge support base of
international conservatives and liberals to their cause against
the latest IMF scheme.
Politically in the U.S., the
IMF would have tremendous opposition from both Democrats and
Republicans in both the House and the Senate. For starters, here
are just a few of the opponents who have voted against gold sales
in the past and have expressed very strong opposition to any
IMF gold sales. The bankers would have to run over this group
to get the U.S. Congress, which has voting control over any and
all IMF voting. The U.S. controls 17% of the voting rights of
the IMF Charter and 85% is needed to sell any gold, therefore
the U.S. controls this issue. Below are just a few of the opponents
to the idea.
Senator Harry Reid (D - Nevada)
already has voted against past sales and he is now Minority Whip,
one of the most powerful positions in the U.S. Government.
Senator Tim Johnson (D- S.
Dakota) ranking member of the Financial Institutions sub-committee
of the Senate Banking Committee.
Congressman Tom Delay (R- Texas)
House Majority Leader the second most powerful legislator in
the House.
Congressman Jim Saxton (R-
New Jersey) Chairman of the powerful House Armed Services Committee
and ex-Vice Chairman of the Joint Economic Committee. One of
the most powerful elected officials in D.C.
Congressman Ron Paul (R - Texas)
Vice Chairman of the Oversight and Investigations sub-committee
on Financial Services, past sponsor of the Gold Coin Act of 1984,
which passed by one of the widest margin of any monetary bill.
These men and many others have
plenty of distrust for paper money schemes and understand that
gold is an important monetary and reserve asset and should not
be used to pay off bad loans made by the bureaucrats at the IMF.
The issue of helping poor third world countries to get debt relief
could easily be accomplished by revaluing the gold held by the
IMF (103.4 million ounces) and using the new value, a $42 billion
asset, to balance the complete write off of the poor country
loans. The IMF balance sheet would not feel the write off at
all. Since many of these loans were quasi grants in the first
place there would be no need to sell any gold. The money has
already, in essence, been written off.
Some gold could be sold off-market
directly to central banks. This was proposed by IMF deputy director
Alassane Ouattara in 1999 but was quickly denounced by the IMF,
as it would create a big headache for the banking establishment.
This action would have opened up a philosophical can of worms.
The perception of official recognition and validation that gold
is a valuable reserve asset from some of the central bankers
(those buying) and the opposite from the selling group (the IMF).
Also the action of a central bank somewhere printing a few billion
dollars worth of their currency and taking the gold would create
a field day for the few dozen of the more or less rogue member
countries of the IMF who would enjoy exchanging some paper and
ink for some real money.
The poor countries in question
that are referred to as HIPC's (heavily indebted poor countries)
owe about $11 billion to the IMF. At current prices this would
amount to about 889 tonnes of gold. If this debt relief was to
actually be accomplished by selling the gold it could surely
take place over a 5 year period or about 175 tonnes per year
that would equal 4% of the current annual global supply of gold.
It could have an effect on
the price as supply is supply, but the gold would be surely
snapped up by the bullion banks and mining companies
that are "short" somewhere between 10,000 and 12,000
tonnes according to some very savvy analysts such as Frank Veneroso,
John Embry and others.
The IMF can actually write
off almost all the poor country debt right now because they have
large loan loss reserves already set up. According to Professor
Jeffrey Sachs, in 1999 the IMF had in the Reserve Account (General
Department) $2.9 billion set aside, and in the ESAF (Enhanced
Structural Adjustment Facility) Trust Fund another $2.8 billion
plus 30 % of all money owed to this Facility was actually grants
so that would add another $1.5 billion. That would total about
$7.2 billion and is probably much higher today. This could be
used for the debt relief.
Special Drawing Rights (SDR's)
were a monetary creation by the IMF to handle trade imbalances
after WW II. This quasi-money allowed countries to manage temporary
international trade liquidity problems with loans and credits
to avoid the problems associated with maintaining fixed exchange
rates at that time. Today the IMF has on its books 21.4 billion
SDRs valued at about $1.50 each or $32.1 billion. Currently the
IMF is attempting to double the SDR amount via a special
amendment and has received the approval from 131 members out
of 185 countries. The U.S. Congress must approve this new increase
for this amendment to the IMF Charter to go into effect. If so,
then the new SDR's would add another $32.1 billion of funds to
the IMF's arsenal of paper money.
This so-called reserve asset
would be available for future needs. Certainly a portion of this
could be used for debt relief. The U.S. Congress will probably
go along with this increase but it could be a trump card used
by the Congressman and Senators to bargain against any possible
IMF gold sales. This group will "sort of" have the
moral high ground. "OK you need to print more money - fine
- just don't sell the gold". As an aside, this doubling
of the SDR quasi money reserve most likely means the bankers
are worried about future international monetary problems. In
that regard you would think they would want to hold on to as
much gold as possible.
Since central banks can literally
create as much money as they desire, it would be very easy for
them to add funds via the IMF's NAB facility. (New Arrangement
to Borrow) This is a facility set up to allow the IMF to borrow
money from certain member countries to handle any crises that
may occur internationally. It has been used 10 times since 1962.
The amount of money available and standing by if needed is about
$51 billion. The IMF could easily change a few by-laws and tap
into this system instead of selling gold.
The highest portion of the
IMF gold is from the U.S. and belongs to the U.S. taxpayer. This
argument is a powerful point to be made. It brings up the question
of why should the U.S. taxpayer pay for all these bad loans made
by a non-U.S. organization? One would think that if the loans
were properly structured they would create wealth, aid in poverty
reduction in these poor countries and be paid off. The fact that
an abnormally large percentage of IMF loans did not work shows
that assets from U.S. citizens should be used in more efficient
ways. A Joint Economic Committee Study in 1999 stated that "
the central IMF budget is treated as a classified document and
IMF finances are very difficult to evaluate because of the obscurity
of IMF financial statements". The U.S. Congress and the
gentlemen mentioned above will surely have the upper hand in
any hearings on this subject and they will use it to beat back
the gold sales scheme.
IMF Gold was supposed to be
used for foreign exchange stability in the past. Since the IMF
is now a global lending institution and fixed exchange rates
are no longer a responsibility of the IMF, it should not be selling
gold assets to pay off bad loans. It should return the gold to
member nations or at least use the gold as a reserve asset as
it was meant to be. Maybe the IMF should actually be buying gold
to shore up its balance sheet.
The political and social pressure
on the U.S. Congress from citizens that own gold and gold mining
companies as an investment will be very strong as we go forward.
Since many times congressional elections are decided by only
500-1,000 votes in many districts, Congressmen do not upset apple
carts that are bi-partisan and since gold is owned by liberals
and conservatives, republicans and democrats the best possible
and potent political force in America will be at work against
the IMF gold sales..and that force is unstoppable. The force
is a coalition. When the right and left get together
in this country on any issue it is all over but
the shouting. Since the IMF gold sales will harm the pocketbooks
of Democrats as well as Republicans, it would seem the IMF votes
needed to sell gold will not happen.
Central bankers will most likely
continue, as usual, to scare the price of gold down from time
to time by statements of gold sales. But they are all too keenly
aware of the growing number of people who realize that the gold
not paper and ink is the real stable monetary element. They also
realize that the gold market should not be manipulated when it
effects the global mining industry (not just gold), dozens of
poor countries that rely on mining for the livelihood of it's
people and tens of millions of retirement and investment accounts
of ordinary people the world over.
February 2005
Kenneth J. Gerbino
Archives
Kenneth
J. Gerbino & Company
Investment
Management
9595 Wilshire Boulevard, Suite 303
Beverly Hills, California 90212
Telephone (310) 550-6304
Fax (310) 550-0814
E-Mail: kjgco@att.net
Website: www.kengerbino.com
321gold Inc
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