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IMF opens up 191.3 T gold sale to wider market

Gold prices fell some 1 percent after Wednesday’s news, with some analysts saying the open market element signalled that demand from central banks — a key fundamental driver — was not as robust as first thought.

However, prices later stabilised above $1,100 per ounce. Commodity-related currencies came under pressure — the Australian dollar was down 0.3 percent at $0.8970 and the New Zealand dollar down 0.4 percent at $0.7003.

The Fund said the sales, which are part of a programme launched last year to boost IMF resources for lending, “will be conducted in a phased manner over time” to avoid disruptions to the gold market.

It also left the door open for central banks to keep buying gold directly from it, nearly four months after India’s purchase of 200 tonnes boosted the country’s gold holdings to the 10^th largest among central banks.

“We are still open to off-market sales, so that window has not closed,” IMF Finance Director Andrew Tweedie said, adding: “All that has happened now is that we are moving to also start on-market sales.”

Tweedie said a key element of the on-market sales was that they would be carefully phased over time. “This is the practice that other central banks have followed successfully, and we plan to adopt a similar approach,” he added.

The move to open up sales to the wider market shook views on the appetite for bullion from central banks.

“The question now is obviously, are current (price) levels attractive for such a large quantity of sales?” said Saxo Bank senior manager Ole Hansen.

“Demand has to come from the investment side, and obviously one is primarily thinking about the central banks. They fact it hasn’t been taken up in the period since we saw India buying last year is putting a bit of nervousness into the market.”

The IMF last year began selling a pre-announced 403.3 tonnes of gold, about one-eighth of its total stock, to diversify its sources of income and increase low-cost lending to poor.

First come, first served

Until now, the gold has only been made available to central banks on a first-come-first-served basis. India’s purchase of 200 tonnes of gold, announced in early November, was swiftly followed by smaller acquisitions by Sri Lanka and Mauritius.

The IMF’s Tweedie told IMF Survey publication the average price for the three sales was a little over $1,050 an ounce, generating about $7.2 billion in proceeds and a profit of about $4.5 billion over the book value of the gold in the IMF’s accounts.

With European central banks and the U.S. Federal Reserve already major holders of gold, analysts have speculated that further purchases are likely to come from Asian central banks.

“I will not be surprised if the Reserve Bank of India or other Asian central banks opt for it (IMF’s gold),” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

“After the global financial crisis, everybody knows that with a longer-term perspective it is not desirable to have concentration of reserves in any one currency. Everybody is trying to diversify.”

But Sri Lanka, one of the initial buyers, said on Thursday it was unlikely to buy more gold from the IMF right now as the island nation had already reached its required reserve level.

“The idea that central banks may turn into net buyers of gold this year is an important element in the psychology of the rally. We believe this explains the slump in prices after the IMF announcement,” said HSBC analyst James Steel in a note to clients.

The IMF’s sales so far have been made within a newly agreed Central Bank Gold Agreement, which limits sales by its European central bank signatories to 400 tonnes a year and 2,000 tonnes in total over five years beginning Sept. 27, 2009.