17 April 2009

India and China want IMF to sell its $100b gold

India and China may press for the sale of the entire gold reserves of the International Monetary Fund (IMF) to raise money for the least developed countries.

The IMF holds 103.4 million ounces (3,217 tonnes) of gold that, if sold, can fetch about $100 billion.

A draft paper exchanged between New Delhi and Beijing proposes that the gold be sold in bullion markets over a period of two to three years. The money thus raised must be used in tackling poverty in the poorest nations.

“We have been discussing with China a common position on the subject,” a senior finance ministry official told Financial Chronicle.
Both prime minister Manmohan Singh and Chinese president Hu Jintao will have to clear the proposal before the representatives of the two countries can take it up at the IMF spring meeting in June in Washington.
The G20 heads of state meeting in London earlier this month agreed to sell a part of the IMF gold to raise $6 billion for poor countries during 2009-11. This was a component of a $1.1 trillion package worked out by G20.
The World Bank has estimated that over 90 million people may be pushed into poverty in the global economic turmoil.
“We are working on a more ambitious proposal of selling the entire gold as it is an idle asset with the IMF,” said the official.
India and China are looking at three ways of using the money so raised. 1) The $100 billion be invested to improve IMF’s liquidity. 2) The money be committed to improving incomes of the poorest countries. 3) A mix of the first two options be considered.

How the sale will affect the bullion market, with attendant problems for currencies, has not been assessed. A large part of the gold may find its way into central banks and private players. Since most of its will be out of reach for retail markets, gold prices may not get hammered.

Globally gold prices now are in the $870 - $950 per ounce range. India and Turkey, traditionally big buyers of gold, have not bought much lately because of low domestic demand. During January to March, India bought a paltry 1.2 tonnes. (Normally, India imports about 700 tonnes a year.) Turkey bought just 40 kg last month.

K Shivram, vice- president of the World Gold Council, said, “Whether the gold will be sold or not is an open question.” If the sale did take place it would be staggered, he said. There could be a temporary correction in gold prices but the market would bounce back.

He added that when G20 announced the limited sale of gold, the prices that had been ruling around $950, dropped to $875. “But they are again moving up.”

In India, gold now quotes at Rs 14,500 to 15,000 per 10 gm. Karvy Comtrade, a commodity brokerage, expected the price to drift to Rs 13,000 by the end of June. He did see an impact of IMF gold sales in the short- to- medium term.

Vibhu Ratandhara, assistant vice- president of Bonanza Commodity, said much depended on the US, which had 17 per cent equity in gold at the IMF.

The gold, if cold, would go mostly to central banks. He said there could be some impact on retail prices which might drop by Rs 400 per 10 gm.

The IMF has built its gold reserves over 40 years. The historical value of the gold, as declared in its balance sheet, is $9.3 billion. Four major sources helped build the reserves. One, member- countries paid in gold their 25 per cent initial quota subscriptions. Two, interest charges on credit given by it were collected in gold from many countries. Three, member-countries can sell gold to it to fight a temporary liquidity crisis. And four, they can make loan repayments in gold.


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