For the third or fourth time in the last couple of years, the International Montery Fund has indicated that it will begin selling up to 400 tons of gold. While we’re not sure if the IMF will actually carry through this time, or if they are simply sending out press releases again now that gold is over $1000 an ounce in an effort to put pressure on the price, this seems to be the first time that the IMF has set a definitive date for the sales to begin. According the the IMF press release, the start date for gold sales is September 27, 2009. Under the agreement approved by the IMF, they can off load a total of 400 tons per year (they have roughly 3200 tons of gold available). In order for the IMF to be able to off load the gold, the US Congress would need to approve of the sale, which they did in June of 2009.
Inquiring minds are asking whether or not this gold sale was approved as a way to appease China because of a falling US Dollar, new trade restrictions recently instigated by the Obama administration, and China’s new policy shift that gives Chinese companies the option to default on futures contracts.
The IMF claims that the gold sale will not hit retail markets very hard and that the price of gold for retail investors should not be affected too much. One must wonder, though, that with 400 tons of gold hitting the markets, might there be a slight effect on the underlying price of gold? Chinese companies, and major international players like Barrick Gold, stand to lose billions on short futures contracts they were using to hedge some of their gold.
Maybe the sale will not affect the price of gold to the downside. But, it isn’t out of the realm of possibility. It’s obvious that the Chinese are making significant moves into gold. The idea is to buy low and sell high — and with 400 tons of gold hitting the market, we could see a decline in the price of gold temporarily, giving the Chinese an opportunity to save billions of dollars on gold purchases. At the same time, with lower prices, the Chinese can avoid getting hammered on their short position on the COMEX.
In addition, two US banks (names unknown, but some speculate JP Morgan is one of them) hold a significant short position in gold as inidcated in Got Gold? (BullionVault.com):
As of Tuesday, September 1, with gold then at $955.90, the three US banks with reportable futures positions held a total of 509 contracts long gold and a total of 75,550 contracts short gold for a total net short position of 75,041 Comex Gold Futures 100-ounce contracts. That was with a total open interest of 384,703 contracts open. As shown below in the Gold Commitment of Traders (COT) section, all commercial traders as a group (all 48 of them) reported a net short position of 216,708 contracts the same day.
Yikes! Someone stands to lose a ton of money if the price of gold doesn’t come down a little bit, no? Given the recent actions of governments the world over and quasi-government organizations, it is pretty clear the retail investors are the bottom of the barrel when it comes to regulations and fair play. Perhaps the big banks and other large interested parties need a little bit of a bail out in the gold market. It looks like the IMF is ready to oblige.
Again, it’s hard to say if the price of gold in the retail sector will be affected by this move, considering most of the IMF gold is supposedly slated for direct central bank purchase. Even if it is affected, however, those holding core gold positions for the long run shouldn’t even bat an eye. Short-term manipulation of prices is standard operating procedure these days. In the long-term, however, nature will take hold.