Blanchard & Co. research note: IMF can't scare gold anymore

By Neal R. Ryan
Blanchard & Co., New Orleans
Thursday, February 1, 2007

Gold is breaking out of a range between $640-650. We should see prices continue rising toward to the $680 range with little resistance and then need a new period of consolidation before setting off to challenge the May 2006 highs of $730.

So the big news out yesterday after the FOMC non-event meeting was the recommendation from the International Monetary Fund's panel of distinguished current and former central bankers calling for the IMF to sell 400 tonnes of gold to help plug the IMF's operating budget deficits. There are a number of reasons why this probably won't happen, but should it still come to pass, it will give the gold market yet another bullish signal on prices.

1. The U.S. Congress would have to approve the move by the IMF because the United States has ultimate veto power over IMF decisions. Congress can't agree on anything currently and might be as partisan a group of lawmakers as has ever existed in the United States. Don't expect anything to happen any time soon from this group.

2. Every time a budget gap needs to be filled, education programs need to be funded, health care initiatives need funding, etc., the IMF gold sale idea is trotted out. The IMF's gold reserves should be viewed as an ultimate insurance policy against global fiscal crisis, not a piggy bank to be broken open repeatedly to help bridge funding gaps. What happens if the IMF does start using gold reserves to pay for ordinary budget deficits and a global currency crisis is repeated in Asia? There was no mention yesterday of cutting IMF spending or reviewing budget expenses. The gold sale recommendation is the lazy way to solve the problem of operating budget gaps.

3. The last time the IMF sold gold reserves was 1976-1980. The all time price high for gold was achieved in 1981. Similarly, when the Bank of England sold 400 tonnes from 1999-2001 and the Bank of Australia sold significant gold reserves in 2000-2001, these were the signals of a gold market bottom.

4. More than likely, any IMF gold will not actually hit the market but will be sold directly to a large central bank looking for significant reserve diversification while bypassing regular market trading fees. China, anyone?

5. The committee mentioned that if the gold sales were to take place, they would be spread out over a considerable period and would stay confined to the quotas of the Central Bank Gold Agreement.

So don't expect to see the IMF selling gold any time soon, and if there even are any sales, they will be done in such a way as to never even hit the open market, not auction-style like the Bank of England's gold sales.

Finally, following Peru's notice to the market that gold production had fallen in November 2006 by 24% was a note out yesterday saying that Peru expected to see gold production falling 13% in 2007. The first, third, fifth, and sixth top gold-producing countries have put out figures that have continue to show slumping gold mine production. Bullish!

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