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James Turk: Gold is likely to break $430 barrier soon
By Gilbert Le Gras
Reuters
Saturday, October 2, 2004
http://www.reuters.com/newsArticle.jhtml?
type=reutersEdge&storyID=6396190
WASHINGTON -- Many Group of Seven rich nations
and gold-mining powerhouse South Africa are
concerned about a proposal to revalue some IMF
gold to fund debt relief for poor nations,
officials said on Saturday.
However, the proposal's author, British Chancellor
of the Exchequer Gordon Brown, said most nations
did not object to the principle of revaluing
International Monetary Fund gold.
"We're in no doubt that this is possible. ... I
don't think in most countries there is an
ideological problem with this," Brown said. "I
didn't ask the G7 to approve my gold proposals
yesterday. What I asked and had agreed is that
further work should be done on them."
But officials from other countries raised concerns on
how this would be implemented and on the implied
reduction of the IMF's working capital -- an amount
Brown said could equal up to the remaining balance
of debts of Highly Indebted Poor Countries (HIPC)
that have yet to be forgiven.
"Are you picking apples off the tree or cutting down
the apple tree to use it as firewood," one official
offered as an analogy for the uncertainty expressed
among policymakers.
"Ideologically yes, but from a technical point of view
we have to have a look in depth at the matter,"
Luxembourg Prime Minister Jean-Claude Juncker
said.
Brown's proposal ran into resistance on three grounds:
some national treasuries of IMF shareholder countries
would have to book the entire write-down in the year
of sale; the likely bearish impact on precious metals
markets; and the permanent reduction of IMF assets.
"What about the financial integrity of the fund? ... Do
we want to use IMF assets this way now and then that's it,
we can never use it again?" a G7 source said, adding
that a majority of G7 countries had come to this view.
Brown said various off-market transaction proposals
would be examined to release proceeds from the fund's
vast bullion holding.
The IMF holds 103 million ounces of gold that is valued
at a fraction of its current market price under a 1971
deal, and Brown said they were valued at one eighth of
current market rates, or about $50 per ounce.
Britain wants the reserves revalued to release billions
of dollars for poor country debt relief.
Gold prices rallied to their highest levels in 5-1/2
months by Friday's close, extending their gains over
the past three weeks to 6 percent as traders said they
were waiting for the final outcome of the G7 debt
relief proposal.
On COMEX in New York, December gold ended 80 cents
higher at $421.20. It peaked at $421.90 overnight,
bullion's highest price since April 13 when it was
near 16-year highs.
"Revaluation is one thing but there is also the
methodology," South African Finance Minister Trevor
Manuel told Reuters. "What we've asked for is a process
that involves both gold consumers and gold producers."
Between December 1999 and April 2000, the IMF
conducted separate but closely linked gold transactions
with Brazil and Mexico.
The complex process involved the IMF selling a total of
12.9 million ounces of gold to Mexico and Brazil, both
of which had financial obligations coming due to the
fund.
The fund immediately bought back the gold at the same
market price, revaluing the metal and settling the two
countries' financial obligations. The net effect of these
transactions was to leave the balance of the IMF's
holdings of physical gold unchanged.
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