In the current European financial crisis gripping the markets’ attention, there are some who might argue that if we still had at least a partial gold standard then none of this might have come to pass. As it is, in what could almost be a case of déjà vu, the IMF is selling gold again; just as the price takes off…. IMF officials could teach the UK Treasury a thing or two.
Call it folly or call it catching a rising tide but when the IMF sold a total of 23.5 million ounces of gold in the second half of the 1970s it was selling into a seemingly inexorable rising price. The IMF auctions ran from June 1976 to May 1980, while the US had sold gold in 1975 and did so again in 1978. The main thrust of this activity was to move the world’s financial system away from gold in favour of a floating exchange rate system and as part of this philosophy the G-10 members agreed that as well as the IMF sales, the amount of gold in the combined hands of the IMF And the G-10 members would not be increased.
The United States initially held two gold auctions, in January and June 1975. The second phase of US auctions was held in 1978 / 1979 and the US sold a total of 530 tonnes. Meanwhile the IMF was holding a series of 45 auctions and sold at total of 778 tonnes, realising an average price of $240/ounce over the period – with sale prices ranging from $109 to $712 as gold soared to $850 on the back of the Hunt Brothers’ attempt to corner silver, the Iranian crisis, the invasion of Afghanistan and rocketing oil (sound familiar?). Total sales, 1,308 t, equivalent to roughly six months’ mine production at current rates.
In today’s money, given the ravages of inflation over the 1980s (gold standard bugs would have something to say about that, too) $240/ounce would have been equivalent to approximately $915/ounce. Comparatively, then, the IMF is doing well this time around as it unfolds its programme of sales of 403.3 t of gold; originally these sales were to be used for defraying the Fund’s operating costs, but now are being targeted at aid for poorer nations. This was the other purpose of the first set of sales in the 1970s – the proceeds were used for a Trust Fund for lesser developed nations.
The sale of 200 tonnes to India in the second half of last October realised $6.7 billion for an average price of $1,041/ounce and when the ten tonne sale to Sri Lanka and the two tonnes to Mauritius are taken into account then the Fund realised an average price of $1,048/ounce for these 212 tonnes.
The IMF is now selling the rest into the open market. In keeping with its stated intention the sales are being conducted an orderly manner, designed not to disrupt the market and are de facto aligned with the CBGA3 – sales under which, incidentally, amount to just 1.6 tonnes so far this CBGA year (stated September 27th) and which, judging from the ECB’s latest figures, have produced no gold sales at all in this calendar year to date. The Fund sold 5.6 tonnes in February and 18.5 tonnes in March; no figures have yet been made available for April. The Fund also still stands ready to sell the gold off-market if any official sector organisation expresses an interest in it.
As if by magic, as the IMF sells in to the open market the gold price makes new highs. Persistent concerns over the euro and politicians’ attempts to maintain the importance of the currency’s role in the financial system and longer-term fears for the US dollar in the face of the fall-out from quantitative easing are spurring heavy investment activity; the transparency of the ETF system means that we can see, up to a point, the level of action in the markets. In two days in early May the SPDR® Gold Shares fund, for example, took up 26.7 tonnes, more than 30% as much again as the amount of gold mined over the period.
Obviously this can’t be sustained, but in this current frenetic environment, investment and speculative appetites are proving hard to sate – if any more IMF metal were to come into this market at the moment it would probably be snapped up.
Meanwhile one other currency under pressure is sterling. Makes one wonder how it would have fared if the UK still had all the gold it possessed in early 1999 before HM Treasury decided to sell 60% of it and then Chancellor Gordon Brown secured the worst possible price by telling the world of his plans in advance. The average realised price, as it turned out, was $274.98, just 15% more in nominal terms than the IMF achieved up to 25 years previously. And in real terms, just 39% of what the IMF achieved all those years previously, and only 24% in today’s money of what the IMF achieved in the dying months of 2009. Something for Gordon Brown to ponder when he leaves No. 10 – if he ever does.