Central banks expected to buy any IMF gold offered

By Devon Maylie
The Wall Street Journal
Sunday, April 5, 2009

http://online.wsj.com/article/SB123896483017890537.html

LONDON -- Gold sales by the International Monetary Fund are unlikely to depress the metal's price because central banks would be likely buyers.

The concluding statement from the Group of 20 industrial and developing nations last week said the IMF will raise $50 billion for aid to the poorest countries, with part of that money expected to come from IMF gold sales.

IMF Managing Director Dominique Strauss-Kahn said the sales refer to the 403.3 metric tons already under discussion and still subject to U.S. congressional approval. No further sales were planned, he said. A metric ton equals 2,204.62 pounds.

Gold prices initially fell 3.5%, dipping below $900 a troy ounce, on Thursday's statement. Analysts said that if the sales go forward, they would be slow, orderly and absorbed by central banks. Friday, nearby April gold fell $11.80, or 1.3%, to $895.60 a troy ounce on the Comex division of the New York Mercantile Exchange.

"Central banks such as those in China, Russia, and Japan are obvious counterparties to this kind of sale," said Morgan Stanley analyst Hussein Allidina.

Mr. Allidina said those central banks could diversify their large U.S. dollar holdings and buy IMF gold off-market, limiting the effect on gold prices on the spot and Comex markets.

The IMF has in the past sold gold to members off-market. In 1999 and 2000, the IMF sold 12.9 million ounces to Mexico and Brazil in authorized off-market transactions, some of which was sold back to the IMF.

The IMF has 3,217 metric tons of gold reserves, making it the world's third-largest official holder of gold behind Germany and the U.S.

Like the U.S. and the Bank for International Settlements, the IMF follows the Central Bank Gold Agreement, a pact agreed to by 17 European central banks to sell no more than 500 tons of gold each year to pact members. The five-year agreement ends Sept. 26, and analysts expect a new one to be negotiated.

Before any IMF sale happens, 85% of the fund's shareholders need to approve the proposal. Since the U.S. has 17% of the votes, it has a de facto veto over the proposal.

There are strict rules over how gold would be sold by the IMF. On its Web site, the IMF said approval would be granted only if the sale could be conducted in a way to minimize disruption to the gold market.

"The market managed to absorb [Central Bank Gold Agreement] sales and still move higher," said Philip Klapwijk, head of GFMS Metals Consulting in the U.K.

European countries that are signatories to the agreement have sold 80 metric tons of gold since the end of September, according to data in March.

"IMF sales don't necessarily mean trouble as long as investors continue to buy. It could also be attractive to central banks with large U.S. dollar holdings," Mr. Klapwijk said.

Recent data for central bank gold holdings from the World Gold Council show there is interest among central banks to increase the percentage of gold in their foreign reserves.

In the first quarter, Russia's gold holdings rose by 29.8 tons, to 523.7 tons. Gold accounts for 4% of the country's total foreign reserves, up from 2.2% at the end of 2008, the data show.

Alexei Ulyukayev, first deputy chairman of the Bank of Russia, said in February the bank plans to continue buying gold to increase the proportion of reserves held in the metal.

Ecuador's gold holdings more than doubled in the first quarter, reaching 54.7 tons from 26.3 tons at the end of 2008. Gold as a percentage of foreign reserves rose to 32%, from 9.8%.

Venezuela's gold holdings rose to 363.9 tons from 356.4 tons in the same period, and to 36% of its total foreign reserves from 23%, the data showed.

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