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February 3-4, 2005

Why is Gordon Brown obsessed with IMF gold?
by Michael J. Kosares

I don't completely understand this obsession Gordon Brown has with the IMF gold. Why does he always target gold in his third world debt schemes? He could just as easily call for a multi-nation bond issue or simply ask the various nations for a U.S. Treasuries donation to cover the third world debt.

I'm sorry, but I don't believe for a minute that the chancellor of the exchequer is motivated solely by his concern for Third World indebtedness. I think we all remember that the last time Brown stumped for IMF gold sales, he failed. The IMF opted for revaluation. The result was that the Bank of England let go of a good portion of the British people's gold reserve at cycle low prices. Now Brown is at it again.

What is really behind all this volley and thunder?

In my view Brown's activity now signals the same thing it signaled in 1999 -- the beginning of a major move upward in the gold price.

We should consider one of three possible scenarios:

1. One or more bullion banks are in trouble in London and gold must be found for the British government and central bank to fulfill as lender of last resort. (Brown is simply trying to get ahead of the curve.)

Or:

2. This is just another campaign (ala the Andy Smith scenario) in a larger war to keep the bullion banks supplied with enough metal to satisfy the needs of the huge gold carry trade (which goes on longer than I ever anticipated it would) and keep it from going bankrupt.

Or:

3. A combination of 1 and 2, in which case Brown sees himself as killing two birds with one stone.

Brown's hope in my view is that he can steamroll gold sales. The talk about revaluation is just camouflage. Many have claimed with some degree of justification that the Bank of England's sales were directed inventory placements -- not sales per se but bailouts camouflaged as sales. Further adding to the mystery surrounding those sales are unanswered questions as to why the Bank of England did not sign the most recent Central Bank Gold Accord in March, 2004.

In a long talk with the USAGOLD sitemaster, Randy Strauss, this afternoon on this subject, he pointed out to me that other members of the IMF might be very happy to receive their gold back in a restitution sales scheme, considering the gold to be of not much use to them sitting at the IMF. Still other members might get it back and be persuaded to sell. Seemingly this is the gold that Brown hopes will end up in the sales and leasing pool.

As a follow-up to the 1999 Central Bank Gold Agreement which did include the UK, the following Agreement was signed March 2004 by all the leading European central banks except the Bank of England:

"In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.

2. The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2004, just after the end of the previous agreement. Annual sales will not exceed 500 tons and total sales over this period will not exceed 2,500 tons.

3. Over this period, the signatories to this agreement have agreed that the total amount of their gold leasings and the total amount of their use of gold futures and options will not exceed the amounts prevailing at the date of the signature of the previous agreement.

4. This agreement will be reviewed after five years."

At the time the agreement was penned, UK stated that its justification for not signing this time was that it currently had no plans to sell gold. That excuse doesn't wash because most signatories in the first agreement were not sellers, either. Apparently the United Kingdom wanted some extra wiggle room with respect item #3 -- particularly leasing operations, and that could be the reason why they didn't sign.

As for the London Bullion Market Association, I would not be surprised if this was nothing more than a machination to free up gold to meet the demand requirements being faced by the bullion banks.

This is not meant to be a comprehensive analysis of Brown's recurring obsession with the IMF gold but simply some groundwork to encourage discussion.

I would like to repeat a brilliant statement from the UK's Sir Henry Tapsell, which I have posted here before as well as in our newsletters and in my book, "The ABCs of Gold Investing":

"The whole point about gold, and the quality that makes it so special and almost mystical in its appeal, is that it is universal, eternal, and almost indestructible. The minister will agree that it is also beautiful. The most enduring brand slogan of all time is: 'As good as gold.' The scientists can clone sheep and may soon be able to clone humans but they are still a long way from being able to clone gold, although they have been trying to do so for 10,000 years.

"The chancellor may think that he has discovered a new Labour version of the alchemist's stone, but his dollars, yen, and euros will not always glitter in a storm, and they will never be mistaken for gold."

Tapsell made that statement in 1999, just before the Bank of England let go of Britain's gold at cyclically low prices ($250 to $300). My question is: What happens if Brown runs into a wall this time? What if the verdict is no sales, no revaluation. Then where will the price of gold go?

By the way, the chancellor Tapsell referred to was Gordon Brown.

Sales, Revaluations, and the Disposition of IMF Gold
By Randy Strauss

The last time British Chancellor of the Exchequer Gordon Brown seriously agitated for IMF gold sales under the banner of debt relief for poor countries was in the early spring of the eventful year of 1999.

When IMF sales were not forthcoming, suddenly the UK itself announced that summer that it would be a gold seller. I don't recall that a direct correlation was trumpeted at that time between those sales and debt relief, so I was always left with a suspicion that a London-centered bullion banking lifeboat operation was more than likely the hushed motivation behind it all.

Those few prestigious London Bullion Market Association (LBMA) banking institutions of the City of London are, after all, perhaps the only banking operations still vulnerable to an actual bank run. Dealing in bullion, they are unlike commercial banks in the sense that they do not have similar recourse to an inexhaustible lender of last resort, and therefore must go begging for any manner of help such as they may find in times of shortage. In response to a liquidity squeeze a central bank can provide paper without limit to regular banks to preserve solvency, whereas the provision of gold deposits to bullion banks are ultimately curbed by physical limits and may come up too short to win the day.

As those surprise UK sales swept the gold market to 20-year lows in mid-1999, it was significant to see the European central banks rally together and respond quickly with their market-supportive Central Bank Gold Agreement by the end of summer.

Interestingly, by the end of the year the IMF finally gave a nod to Brown's earlier notion of debt relief, but the IMF did it through off-market gold revaluations, thus setting a bit of precedent and keeping the book closed on actual sales that would have drawn down IMF physical gold reserves.

With Brown agitating again for IMF gold operations (sales or revaluations) under the banner of debt relief six years after his initial appeal, one has to wonder: Is he truly the world's leading humanitarian, or is there another angle?

If debt relief is the legitimate reason for the clamor, 1999 precedent suggests that revaluation would be the more likely course of policy action.

But if we see what seems to me to be the less likely event -- if actual sales of IMF gold are selected by the necessary 85 percent majority of IMF voting power -- I would tend to interpret it as a sign that various IMF members (e.g., France, Germany, and others) are simply wanting their gold back. This precedent of behavior was last seen in the mechanism of the restitution sales of the late 1970s when several member countries bought back some of their original gold deposits from the IMF.

With the Chancellor's drive clearly suggesting gold sales as an alternative to the established precedent of IMF gold revaluation, and having so recently sold half of the gold of Her Majesty's Treasury, the UK itself may figure prominently among the countries that would like their gold back. This is especially true if the Bank of England anticipates that future lifeboat and liquidity operations may be necessary as the LBMA's business heads toward mothballs, a phenomenon which is legitimately suggested by ever-shrinking clearing volumes demonstrated over the past eight years.

Publicly reported clearing turnover in London-centered bullion banking operations during that span of time has been withering. From average daily levels exceeding 1,200 tonnes of gold cleared per day it has fallen to less than 500 tonnes per day in present business. Typically banks rely on growth (inflation) to ensure liquidity and solvency, and yet here we see this unique sector of banking is staring into a very real and formidable contraction. One wonders what their various gold depositors might now be thinking.

Viewed from that angle, the two new gold Exchange Traded Funds introduced on the New York and American stock exchanges may be just part of a long train of devices to preserve institutional liquidity, as they are always uniquely vulnerable to demands for physical deposits and consequences of insolvency.

End note:
Shortly after this commentary was prepared, US Treasury Under Secretary John Taylor told a group of reporters during his trip to the G7 meetings Feb.4-5 in London that the US is "not convinced of the need" to sell International Monetary Fund gold to finance debt relief.

And so the question remains -- if IMF gold sales need not be involved in the financing of debt relief, why does Gordon Brown remain seemingly obsessed with public statements promoting this course of action? A first conclusion would be that there is not enough gold to go around to satisfy the parties who concurrently want the security of metal in an environment of ballooning debt and derivatives.
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© 2005 USAGOLD All Rights Reserved

These articles were originally offered as commentary at the www.USAGOLD.com website and are republished with amendments by and permission of the authors.

Michael J. Kosares is president of USAGOLD-Centennial Precious Metals and author of the 2005 book, "The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold"

Randy Strauss is a professional engineer and informations consultant, and free-lance sitemaster for USAGOLD

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