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The IMF And Gold: Point By Point

By Elizabeth GoldmanCommoditiesOct 16, 2012 02:10PM ET
The IMF And Gold: Point By Point
By Elizabeth Goldman   |  Oct 16, 2012 02:10PM ET
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IMF Headquarters
IMF Headquarters

Out of the many crosscurrents affecting gold trading, one particular factor -- the International Monetary Fund (IMF) has recently released a newly revised and much bleaker global-growth forecast.

Add to this the October 2012 meeting of the IMF and World Bank that revealed troubling news of increasing friction between countries like Germany and Spain, as well as worries for Greece’s slow economic recovery -- and the market reacts by slowing down on trading, including metals like gold and silver.

Formal Warning
At the end of the meetings, the IMF steering committee presented a formal statement warning central banks about the worsening global outlook, stating that economic growth, globally-speaking, has “decelerated and substantial uncertainties and downside risks remain.” This gloomy global growth forecast by the IMF has had a detrimental impact on gold trading -- but it’s not all bad news.

The Domino Effect
When the IMF issues a bleak forecast regarding global growth, it causes revenue to flow to the U.S. dollar, sending it higher. And since gold commodities are priced with the U.S. dollar, the world's primary reserve currency, it constitutes almost half of the trading volume of all major currencies. The U.S. dollar is the default currency for the majority of transactions, including Forex trading. The more valuable the currency, the less amount of dollars it takes to buy the same amount of gold, causing prices to drop. Financial experts predict this drop will be temporary, stating gold will go back up again once the IMF releases its remaining funds from gold sales.

IMF Gold Reserves And The Market
Gold was the central player in the international monetary system up to 1973, when the Bretton Woods system of fixed-exchange rates folded. Since that time, the place of gold in the international monetary system has slowly declined. However, gold is still a viable asset in the reserve holdings of several countries, and the IMF continues to be one of the biggest official keepers of gold in the world -- and for good reason. In order to maintain a strong economic foundation, the IMF must hold a relatively large store of gold. It’s what it does with that supply that affects the market.

IMF Gold Sale, A Slow Success
In the spring of 2008, the IMF adopted a new income model and decided to sell 403.3 metric tons of its gold reserves to help support the Fund’s concessional lending capacity and to pay for day-to-day operations, as well. What's important to remember is the fact that the IMF didn’t expect world gold prices to soar during the sales period, generating huge profits, which it has begun to distribute to its membership. It approved the remaining amount of $2.7 billion dollars in late September 2012 to boost the IMF’s concessional-lending vehicle, the Poverty Reduction and Growth Trust (PRGT).

The Effect Of IMF Gold Sales On The Gold Market
Because the IMF sold its gold over a long span of time -- between two and three years -- there was little influence on the gold market. In fact, even if it sold the entire amount slated, some $6 billion dollars, it would only add up to about 28% of the average daily volume of gold sales. In addition, the IMF’s governing principles on gold prevents it from selling large amounts because it has to keep a substantial store of gold in place in order to keep its overall financial position strong, to face unpredictable circumstances and to maintain the health of the international gold market.

IMF And World Bank Activity
As previously mentioned, the IMF and the World Bank both hold a specific portion of gold in reserve. Online gold-trading prices are affected by the rise of that reserve. In addition, if the IMF or the World Bank decide to buy gold, their confidence rubs off on gold stocks and trading. Interest-rate changes can influence gold trading -- a rise in interest rates prompts traders to invest in currencies with high interest rates, causing gold prices to fall. A lowering of interest rates causes prices in gold to rise, meaning online gold-trading prices relate directly to central-bank policies and the subsequent trader reaction.

IMF Meetings Affect Trading And The Forex Market
The results of the most recent IMF and World Bank meetings, as well as future meetings, have a noticeable effect on world trade and the Forex market. This trickle-down effect happens when those in the market react to the ever-changing stance of the IMF. The most interesting change is their softening attitudes toward troubled Euro-zone countries like Greece and Spain. The influence of the IMF reports will force the troika to suspend austerity budgets, allowing the IMF to provide lending opportunities to Greece, among other countries, in budgetary crisis. More money circulating is always good for trading -- and especially for gold.

The Next Player -- The EU Summit
The upcoming EU Summit promises to clarify what Spain plans to do and how Greece will find relief. And the whole world, including the IMF, are literally holding their breath in anticipation of what will conspire at the summit, whose goal is to aid and encourage European countries to hold back on tax increases and budget cuts to encourage economic growth. If the EU Summit can address these issues, it would help strengthen the euro, which will increase gold prices.

In summary, there are several things the IMF does that affect trading as a whole, but particularly gold trading, because it affects interest rates and prices of gold on the Forex market. And although we made it through the recent IMF and World Bank meetings held in Tokyo, we are now bracing for the EU summit. What happens there will either support what the IMF reported or tear it apart, leaving us back where we started -- in a hopeless, global economic decline, making a mess for those who trade in gold.
The IMF And Gold: Point By Point

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The IMF And Gold: Point By Point

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Michael Gartlan
Michael Gartlan Oct 23, 2012 3:45PM GMT
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Not true. The dollar rises against gold is due to manipulation of the price of gold by things such as decreasing the gold lending rate to a historical low when the money cartels realise that gold is moving too high.
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