g7 approves imf gold sales , page-4

1. Of course the biggest open question is whether or not the U.S. Congress is going to approve of the sales. The United States, after all, was the biggest contributor of this gold in the first place, so why shouldn’t it have veto power (and it does). The last time this came before Congress (a Republican Congress), it was blocked by a coalition of Republicans and Democrats. It never reached the floor. I’m sure there were a few key players who made it clear that such a bill would likely not even make it out of committee. The Republicans primarily do not want to hurt U.S.-based gold mining companies and the Democrats primarily do not want to undermine economic progress in places like South Africa which has enough problems at the moment. From the perpespective of this long time gold watcher, the IMF can do whatever it wants in April, this is still going to be a hard row to hoe in the Congress.

2. When you consider the potential harm the IMF would do to the very people it purports to be helping in the third world by selling this gold, you wonder to what degree it really is there to help and to what degree it exists simply to perpetuate its own bureaucracy. The IMF would probably say that the sales are unlikely to have a major long term effect, so why not? It was telling that the IMF’s Dominique-Strauss appears to be after an income from selling gold. If that sounds familiar, it should. Income is what the misguided Gordon Brown claimed to be the objective when Britain sold a good portion of its gold beginning in the late 1990s — a mistake for which Mr. Brown still pays politically. In fact one detects the hidden hand of now Prime Minister Brown in all of this. It all sounds so vaguely familiar. If the IMF had sold its gold when Mr. Brown pushed for it earlier this decade, its income would have been roughly a third of what it will be by selling the same number of ounces now. Whose to say how much wealth the IMF will have thrown away given the perspective of five years from now. But then again, we may be back to “peering into the abyss” and all of this has nothing whatsoever to do with “income” but instead with bailing out some strung out European banks. Why is it that you never hear anything from the U.S. about IMF sales? Why is Europe always front and center on this issue?

3. There’s another aspect to this on the political front. If a member of the Bush administration agreed to the sale, and it appears that this might have been the case (SecTreas Paulson was the senior U.S. representative), the question still remains how hard it will push for the sale back home in the States. The president just made a couple of comments out on the campaign stump, as reported by the New York Times this morning, that the real issue facing America today is security — the issue that the Republicans used to beat the Democrats in the last two presidential elections. The Bush administration has no special love for international organizations. Of course, the United Nations heads up that list, but one wonders how much respect the IMF and World Bank carry in the Bush administration as well (Or are they seen more as anachronisms and threats to U.S. foreign policy?). Quoting Mr. Bush yesterday: “They** tend to think Washington has the answers to our problems. They tend to believe our country only succeeds under the expansive federal government. They tend to be suspicious of America’s exercise of global leadership — unless of course, we get a permission slip from international organizations.” So, as you can see, there is no love lost in the Bush administration for international organizations. Whose to say the Bush administration would not like to see the IMF die a quiet death? If so, how does selling the gold the United States has on deposit there contribute to that goal? There is a time and place for everything and there are a great many within the United States who think that the time for the United Nations and two of its primary branches — the IMF and World Bank — have come and gone.

** meaning the Democrats, of course

4. Even if there are IMF gold sales, it may not contribute to any long term erosion in the price. I was a gold broker in the mid-1970s when both the IMF and the United States Treasury sold gold after the first wave of that gold bull market. I remember those days well. The effect of the sales was like a throwing a dime into a black hole. The gold was absorbed quickly out of monthly sales until those sales became expected by the market and finally irrelevant. At first the price reacted adversely, then it stabilized and made its then historic run from $100 to $875. Then, like now, people, including major institutions, were scrambling to get out of the dollar, and the sales were seen as an opportunity. I suspect that even if the IMF were successful in getting approval for the sales, they wouldn’t have much of a long-term effect on the price.

5. That’s not to say that we won’t have some short term volatility. In discussing the potential for sales this morning with son Jonathan who talks with clients every day, he thought that we might want to send the IMF a big “Thank You” card if their announcement results in lower prices next week. There are a great many people waiting/hoping for a correction. Of course, it won’t be just USAGOLD’s clientele viewing the sales as an opportunity. Don’t forget the dire need for gold among the mining companies and the bullion banks. Then you’ve got the huge sovereign wealth funds and their trillions just waiting for an opportunity to buy physical gold in quantity. 3200 tonnes of gold, is a lot of gold and $92 billion, the current value, is a lot of money. When you consider, however, that the sovereign wealth fund of just the United Arab Emirates at between $500 billion and $875 billion, you get an idea how high the price of gold would have to go in order to make a real difference against the sea of dollar liquidity now floating around the planet. Beyond the mammoth UAE fund, you’ve got Singapore at upwards of $300 billion; Norway at $300 billion; Kuwait at $175 billion; and on and on it goes to an estimated total of $2 trillion in just sovereign wealth funds. (China in this realm is a small player at reported $66 billion.) Which one of these nations does not value gold? Now you see what I mean about dropping a dime into a black hole.

5. To make a long story short, a lot of people would put a big bow on IMF sales if they were to occur. That’s probably why they won’t happen. But then again those with the need to shed dollars, or buy back their short positions, can always hope.