Poor news on the US economy and an International Monetary Fund proposal to sell 403.3 tonnes of its gold reserves as part of a move to revamp its sagging finances, injected a note of uncertainty into the market.
The financial overhaul was revealed in Washington yesterday, after US markets had closed, ahead of the spring meetings of the IMF and the World Bank later this week.
The sale, amounting to some 12% of its gold reserves, could yield around $US11 billion, which would go a long way to supporting the financial reorganisation of the institution as it seeks to surmount a downturn in lending to troubled countries, its main income source.
But the IMF is adamant it won't sell gold and disrupt the world market.
The downturn in revenue has come because of the improvement in emerging country economies (the so-called BRIC countries, Brazil, Russia, India and China) which have been recipients of IMF aid in the past.
So have the next tier of developing countries, such as booming Turkey and Argentina and a host of other smaller countries with strong performing economies, and no need of assistance, especially cash, from the Fund.
IMF Managing director Dominique Strauss-Kahn said in a statement the Fund would use the funds to help shore up IMF finances and create a new $US6 billion endowment with more diverse investments to generate income.
"An endowment would be created with the profits from the limited sale of 403.3 metric tons of the," he said. "If approved, gold sales would be conducted in a transparent manner with strong safeguards to ensure that they do not add to official sales and avoid any risk of market disruption."
.The Fund's gold sales will be coordinated with current and future Central Bank Gold Agreements (CBGA). Under the current CGBA, a group of European central banks have agreed to limit their gold sales to no more than 500 metric tons annually.
The IMF website says IMF holds 103.4 million ounces (3,217 tonnes) of gold, making it the third largest official holder of gold. The gold is valued on its balance sheet at about $US9.2 billion on the basis of historical cost. The market value of this gold was $US95.2 billion as of February 20, 2008.
"The sale would affect some 13 million ounces of the IMF's 103.4 million ounces of gold reserves. "The IMF's finances have become unsustainable following a large decline in credit outstanding in recent years. In the absence of measures, an income shortfall of $165 million in FY2007 is expected to widen to about $400 million by FY2010.
Despite the assurances, traders say the sale process could have a dramatic impact on the gold market.
The recent surge in prices to well above $US800 an ounce has curtailed demand from the important jewellery trades in India and the Middle East. The fall off in demand worsened in the last quarter of 2007, according to figures from the World Gold Council, and has continued into February this year.
Gold production is falling because of easing output from Australia and especially South Africa. China is producing more and is now the world's biggest producer, but that won't be enough to make up the shortfall. Scrap supplies are rising as people cash in old jewellery and other things with gold metal in them. More and more gold is also being soaked up by Exchange Traded Funds like the State Street vehicle which is now a major holder of gold.
The IMF said that with these measures it expects to close the projected income-expenditure gap of $US400 million within a few years. Around 400 jobs will be eliminated at the Fund, which is looking to generate income of up to $US300 million a year from the cuts and the new fund.
