IMF gold plan poses tricky twist for market

The IMF’s strategy to capitalise on surging gold to raise new resources for lending was first announced in 2008 and had been comfortably received by the market, with expectations for enthusiastic takers amongst Asia’s central banks.

Its sale of 200 tonnes of this quota to India, announced in early November, and small disposals to Sri Lanka and Mauritius prompted a frenzy of speculation over further sales.

But the key take-away for some analysts from the IMF announcement that it would soon begin phased open-market sales for its remaining 191.3 tonnes of gold was that central bank appetite for bullion may not be as robust as first thought.

“It could be viewed quite negatively that central banks, who obviously would have been favoured as buyers for the remaining gold, have found current (price) levels unattractive,” said Saxo Bank senior manager Ole Hansen.

The 191.3 tonnes on offer compares with total identifiable demand in 2009 put at 3,385.8 tonnes in the World Gold Council (WGC) demand trends survey.

Central bank activity has been seen as a key foundation of gold’s ability to rally even as other fundamentals, such as dollar weakness, faltered.

A third European central bank pact to limit sales seemed to cement that fundamental support, assuring investors that any official sector sales would be orderly.

Spot gold hit a record $1,126.10 per ounce in January and is still up almost a percent so far this year, even after a sustained period of falls.

WGC CEO Aram Shishmanian said that although some countries could sell gold reserves to cover budget deficits, the trend was unlikely to be big enough to damage the market.

The WGC’s managing director of government affairs, George Milling-Stanley, said the fact that the IMF had sold more than half of what it had on offer in off-market deals was a success.

“Any talk of this sale being a failure by the IMF is nonsense. The IMF always intended to sell this gold eventually on the market,” he added.

Lukewarm reception
No one can be sure what the psychology was behind the latest IMF development, but if the hope was to entice new official sector buyers, early indications are lukewarm.

Sri Lanka’s central bank was unlikely to buy more IMF gold right now as the nation has already reached its required reserve level, its governor said.

HSBC metals analyst James Steel noted that the idea that central banks may turn into net buyers of gold this year was an important element in the psychology of the rally.

“The fact that [the IMF] has announced that the remaining gold…will be sold on the open market is an indication that the IMF has been unable to find a willing buyer for the remaining gold,” he said.

Commentators have previously identified China, which last year said it had been adding substantially to its gold reserves in recent years, as a potential buyer of IMF gold.

But former officials poured cold water on that idea last year, pointing out that it would be cheaper for China, the world’s biggest gold miner, to buy domestic supply to boost reserves, and that near-record prices made IMF gold too expensive.

All is not lost?
After an initial knee-jerk drop, gold prices are recovering some poise, hovering above $1,100 per ounce.

Commerzbank said in a note to clients that central banks that had been waiting on the sidelines, may now see an opportunity to buy.

But with a clouded demand picture from central banks, and uncertainty on the dollar’s trajectory, some analysts are beginning to wonder about where the impetus to take gold higher from here will come from.

A fiscal crisis in Greece has helped to send gold prices in euros to record highs and dollar-gold to one-month highs approaching $1,130 an ounce.

“It doesn’t feel like we’ve reached the top of the market, but the problem is the huge amount of investment demand that has been behind this price increase. It doesn’t seem to be here at the moment,” said VM Group analyst Matthew Turner.

“The caveat is that you never quite know where the investment demand is going to come from. The Greece issue may be the catalyst for European investors to buy gold – so it’s not all over yet.”