Monday, April 06, 2009

US to Sell Gold Reserves

World leaders agreed the other day, that the International Monetary Fund should sell gold to help stimulate world economies. Naturally the price of gold dropped below $900 per ounce when the markets learned that the IMF is going to sell 400 tons of gold.

Let’s just picture the IMF secretly located on some remote island with 3,400 tons of gold. Pretty implausible, isn’t it? This gold had to come from various world governments (i.e. members of the IMF). Most probably the IMF has pledges of gold in the form of paper certificates.

Here is where it gets technically twisted. Before when the world was on the gold standard; each country had a gold room with locations assigned to each and every country. If Germany sold one million dollars of goods to the US, one million in gold went from the U.S. part to the German location, and vice versa. If one country in the U.S. depositary got a pretty good size accumulation of gold, they might send over a boat to pick up the surplus. Then when you get about 10 of these world depositary storage vaults talking back to each other, the boat is not necessary, you owe to some other country your gain here.

If the IMF were to take a U.S. gold pledge certificate and submit it for cash currency, no gold is sold, but the IMF’s account now has less gold bars in it. It is here, that the true purpose of the gold backing can be realized. The gold guarantees the purchasing power of the sponsoring government's currency. If the US currency drops in value drastically, we have to cover the gold certificates at the present gold exchange rate.

Imagine that the IMF comes to one of these storage facilities to take physical possession of the gold, and then they sell it. Assume that the gold is sold in the US for dollars and the IMF gets a U.S. currency deposit of X amount of dollars. The extra effort to sell the gold on the spot market doesn’t make a whole lot of sense, does it?

Once you understand that the IMF holds no physical gold, the picture becomes clearer. World governments are realizing that there is a rush to convert currency into gold and as prices for the real thing escalates (it doesn’t seem like you can lose on this investment). So if we take the headline “IMF to sell gold,” and change the wording a bit to: “U.S. Government to sell down its Gold Reserves,” and I might add in parentheses, (in an attempt to tank the speculation in gold commodities), you see the real story. It didn’t work for Nixon and he had to eventually close the gold window.

I do caution the readers, I have not been able to really find any viable research information on what you have just read. Most references, from Google, were extremely vague in reference to the tangible assets of the IMF. You have to ask yourself, where do you get 400 tons of gold to sell, matter of fact like? Once you answer that question, this seems to fall into place. I could be accused of using a razor blade to make puzzle pieces fit, but I leave it to you the reader.


Gary said...

This may be off-topic but what I can't figure out is why would any government that can print its own currency ever sell gold?

Jim in San Marcos said...

Hi Gary

What the government wants to do is drive the price of gold down by selling outrageously large amounts of gold. This theoretically keeps people from redeeming their dollars for gold if they perceive an imminent loss.

Anonymous said...

The IMF has been hoarding gold. They've been taking it from countries and not accepting their currencies. Americans will be very surprised when they learn that there is no gold in Fort Knox or any US vaults. It is all in the IMF's vaults. SURPRISE!!

Jim in San Marcos said...

Hi Anon 12:00

I stand by my claim that the IMF holds no physical gold.

Countries can afford to own gold, they pay for it with currency that they print.

The member countries that make up the IMF store the gold that is pledged to the IMF.

Anonymous said...

Dang, I wish I had some more cash on hand to buy right now.

This 'head-fake' downward won't last forever.


Anonymous said...

Forget gold! Wake up and smell the coffee. We've moved into fiat currency and it will all be digitized. Creation of money is now done by hitting some keys on a computer. Money is just digits in cyberspace. Soon the whole global money system will be digitized. All transactions will be done with a digital card or computer terminal. Governments will be able to monitor all financial transactions this way. Those hoarding gold bars and coins are going to lose big time because it will never be an acceptable currency within the system. You may be able to use your gold or silver coins to buy something from someone... but only if they want gold and find it desireable personally. You won't be able to use gold to buy your groceries, your gas, your medicine and health needs, your clothes, and all the other vital necessities. Don't you guys get it. Government is in full control of money and will soon complete the administration of it with digital money that will preclude paper money.

Anonymous said...

Right. It is all about taxes---the only money that is acceptable is that money that the government accepts for payment of taxes---and through digitized money the govmt will ensure that you pay ALL of your taxes and are also unable to do transactions without the government getting its share. With the global collapse governmts are going to want to squeeze every penny they can out of existing taxes and will soon be creating more taxes and raising them.

Dan Mac said...

In other words....the U.S. trying to stave off a potential short squeeze of sorts. Defend the position with the last few bits of ammo.

A week or so ago there was a headline pertaining to world CBs limiting gold sales. Seemed odd in that I would expect that would support the price. The Fed certainly doesn't mind rising gold as it's barometer indicating that deflation isn't going into a tailspin. Or does it?? Oh that's right, that would be a sign that the currency is eroding no? Seems like they are in a box.

re: anon's comments on the digitization of currency etc, I thought this link was creative:

I'm not supporting the ACLU but the message was cleverly presented.

Jim, if I wasn't supposed to post a link like that in a blog, let me know.

Jim in San Marcos said...

Hi Anon 11:58+12:58

Gold is to government as sunlight is to a vampire. Gold and sunlight are real. Governments and Vampires are creations of the mind.

Both posts are way off topic with no facts to support your argument.

I agree that no one would show up at a gas pump or supermarket with a gold coin. A thousand dollars worth of groceries or gas is a tad much, I certainly wouldn't want dollars back in change. But I would like to point out that three silver dimes would buy a gallon of gas in 1964 and they still will today.

Jim in San Marcos said...

Hi Dan Mac

Several things are in play here. People in many foreign countries are dumping their currency for gold. I believe Thailand has banned gold sales. The rush to buy gold results from people losing faith in the paper currency. In most cases, they have experienced the collapse of their currency before.

In other more well to do countries people may be selling gold to cover debts.

It's not hard to figure that if the world doubles the money in circulation without doubling the goods produced, everything doubles in price. It doesn't mean that gold has doubled in price, you have just locked in your buying power at the old exchange rates.

Governments could care less about the price of gold, everyone is off the gold standard. Governments can exchange paper money for gold any day of the week. It is really a meaningless transaction unless the government wants to purchase goods from another country and their currency isn't worth a Continental Dollar. In that case gold seems to work real good. Cash on the Barrel Head!

I think that gold could go a lot higher, but it is a very peculiar metal. It never behaves as expected.

The link you posted was funny. I have no objections over links and I think most bloggers feel the same way. It's the pits when someone cuts and pastes a long article into the comments section, when a link would be the best route.

Take care and thank you for the link.

Anonymous said...

If you were planning to sell a large position of anything, why would you announce your intentions in advance and drive the price down, resulting in a lower price for yourself?

Jim in San Marcos said...

Hi Anon 8:57

I agree completely, it does make you wonder. Whose stupid enough to fall for it? "Nobody" seems like the right answer.

The administration in charge is betting that this will curb futures trading in gold somewhat. It won't work. Next step ban ownership of gold.

Mike said...


Since dollars and credit (debt) are basically the same thing since money is no longer a store of value, I have a hard time seeing how the Gov is going to kick off your basic consumer inflation in an environment were everyone is choking on debt and losing jobs at a steady rate. The only thing I see happening is like what FDR did in 1933 by declaring a devaluation of the dollar. So as to not make this a beggar thy neighbor situation I feel it may be a global devaluation of all G20 currencies. The key is to pump up Asset prices so that they are greater than the current overwhelming debt burden strangling the world economies.

Anonymous said...

You need food, water, medicine, health care, clothes and other basics no matter what happens. So what is the most optimal answer?

You need to have cash, gold coins, silver coins, a garden (so you can eat and trade food for other things), other things to trade (tools, tires, copper pipe, ammunition, seeds, etc. etc.).

You need it all so that no matter what turns the economy takes you can survive.

No one can argue or challenge me on this point.

Joseph Oppenheim said...

You need food, water, medicine, health care, clothes and other basics no matter what happens. So what is the most optimal answer?<<<<<

You raise a good point.

Sure, there is room for gold, and silver coins in one's portfolio.

However, the recent Fed move dramatically made a recent case for having some good quality stocks, producing needed products, with little debt and paying good dividends which are raised each year. Sure, the recent move up in stocks is due for a correction and sure, the economy still has some hard times ahead especially because unemployment will probably continue to increase, so it is also wise to keep some cash in reserve to pick up better bargains as situations present themselves.

What many stock pessimists don't realize is that the crash of 1929 began with stocks at about 30:1 PEs, the 1990 or so Japan crash from about 70:1 PEs, while our stock collapse began when PE's were about 15:1 or so, overvalued, but not by a whole lot. Sure, financial stocks and others with too much debt were highly overvalued - but not all stocks. Plus, we had recently had the collapse not long ago which had already taken the fluff out of many stocks.

The recent Fed move basically said buying some such good quality stocks were a good strategy since they pay higher dividends than CDs and Treasuries while also offering some inflation protection, also some deflation protection because of the dividends and low debt.

Remember, such stocks are basically a partial hard asset play in that they own hard assets (land, buildings, equipment, etc) and have the intellectual property (patents, knowledge, etc) to add value to raw materials hence have a built-in way to increase prices.

One important way to value a stock is its earnings yield. Many such companies have about 10:1 PEs, hence an earnings yield of 10%, not bad, compared with other investments.

As I said, we are due for a correction, but to ignore them is also a risk, especially since diversification is always a wise approach.


Jim in San Marcos said...

Hi Mike

You raise an interesting point about inflation.

In 1929 the banking collapse and the implosion of the money supply meant that there were very few dollars left in anyone's wallet to purchase the large supply of goods still held in inventory for sale. Prices had to drop.

In the present case, there is not going to be an implosion of the money supply no one has lost a dime, everything is insured. There will be, given a few months more that double the money necessary to purchase all of the goods held in inventory. You are already seeing inflation in items that have a steady stream of consumption, steak, eggs, potato chips. Perishable goods are first to rise, there is no inventory on this stuff, and the the consumables like razor blades and toilet paper. Toilet paper is a buck a roll now!

It appears that we are seeing deflation in spots, this is happening in areas where there was severe overproduction like cars homes, fast food outlets, coffee shops and electronics.

The government is tripling its spending which means that it is also tripling its consumption of available product. Printing money does not grow food or produce products for consumption. On the other hand, you still have the same paycheck while the government jacked up their consumption by 4 trillion dollars.

Another point to consider, there were no huge government social programs in 1929, no humongous national debt, hardly anyone paid taxes and government was small.

I guess we can say its different this time and really mean it ;>)

Jim in San Marcos said...

Hi Anon 9:28

There is no argument over what we all need.

If you have nothing, you have lost nothing. If you have saved up for retirement for many a year, it may be toast. All we are discussing are ways to keep from losing what we have.

I'm not giving out investment advice, but rather an informal view of what the Yahoos in Congress may be trying to do(to us).

Bear in mind if we all thought the same, we would all be driving the same type of car. Your views are on the right track.

You mentioned seeds and a garden. I think you'll also need a dog. Food grows slow, you have to keep an eye on it ;>)

Take care and thank you for your post.

Jim in San Marcos said...

Hi Joseph

In normal times I would agree. But with the Congress and Whoever Else rewriting the stock transaction rules, it's time to bail and run.

Buying stocks now, is like picking up a hooker that has her mother hanging on as baggage. The price might be right, but mom wants her daughter married.

Kidding aside, I do see value in investing in train and public utility stocks, they could be a great hedge against inflation and utilities have usually paid a pretty high dividend.

The only advice I can give everyone on buying stocks from my experience, is that things change for the worse and the better all of the time. You have to pay to play.

IMHO keep out of stocks they have a long way down to go. I could be very wrong if inflation takes off.

"Faites votre jeu, mesdames et messieurs" and good luck.

Anonymous said...

If this continues on the course it's headed I'm liquidating my assets (and not paying any taxes on them, screw this corrupt government), pulling all my cash out of the bank and leaving for another country. Not sure where. Maybe Panama or Costa Rica or some such. Not gonna get highly taxed, have my dollars become worthless, and live in a fascist state. Lots of people are already going off shore because of the imminent collapse of this country. The banksters are looting the middle class and the rich and turning this country into a shadow of what it was. Look at the condition of the American people and their level of action and understanding... a joke. Escape is the only answer.

Jim in San Marcos said...

Hi Anon 11:40

I don't see a safer banking haven than the United States with the possible exception of Canada. The rest of the world's financial system is in shambles. In a lot of banana republics, when the political system fails, the banks fail with them.

Earning money isn't hard, holding on to it is. Best of luck to you.

Anonymous said...

I've read that Canadian banks are much stronger and stable than US banks. They didn't get heavily into subprime and derivatives. They are starting to inflate but they will never do it like the USA. Canada may be the best place to keep your money as the US continues to fall apart. Plus Canada is a resource country that will be supplying China and will be better off than the US.

Rob in NS said...

I'm not going to stick up for the banks here in Canada. I fear they and our federal government are just better at covering up their mistakes.


Jim in San Marcos said...

Hi Rob and Anon 1:40

From what I have read, it looks like Canadian banks didn't get sucked into the Alt-A loan market, CDO's and SIV's like their US counterparts did. As Rob implies though, with enough kitty litter, you can hid anything.

Anonymous said...

The US government will do whatever they need to do with gold to ensure that everyone is forced to use the fiat currency for all aspects of life. Gold will be out of the game.

Once money is completely digitized your only way to survive will be by being the perfect, tax-paying, law abiding citizen. And if you're not... you'll be cut off and unable to participate in commerce.

Rob in Nova Scotia said...

Better off than the U.S., I doubt it. Sadly when Wall Street threw the anchor to keep itself off the rocks they were not worried about where it landed in water. Our fate as a nation is sealed with yours, we just haven`t yet noticed the gaping hole where the anchor went through our deck. I picture this ending like the final scene of the movie Titanic. Big ship goes down with lots of stuff floating dead in the water.

Jim didn't the central banks do something similar in early 1980's when the price of gold was skyhigh?


Jim in San Marcos said...

Hi Rob

There are a few things I need to research here. There is the IMF and there is also the Central Banks. It looks as if the Central Banks were selling in the 1980's, that would be individual countries.

The problem I find right now is trying to define what is happening, and in abstract terms it is rather simple, everyone knows what's going on. But when you try to nail it down with things you can point to, it has a dead fish smell.

The Central Banks did do something similar in the 1980's for many years up until 2005. What I have a problem with is references to the IMF selling gold certificates as actual gold on the futures market. I wonder if there is any truth to this? I hesitate to even mention what this could imply. We could have a very sick world bank.

I do think that we can flatly agree that things are not as they appear. Other than that, there are a lot of unanswered questions out there looking for an answer.

Rob in NS said...


I'm not an ecomonics expert but to me it looks like the endgame is to scare all the money out there into T-Bills and stock market. The movers and shakers still want to blow bubbles instead of dealing with the underlying problems in the economy. It does scare me when they call it a gold pledge certificate. You have to wonder if it is backed up with a promise sandwich instead of actual gold bullion.

I digress a little, but I was in Ottawa and toured the Mint in February. The thing that stuck me about tour was the one ounce gold coins had a face value of 200 dollars cash. So even when they are selling the real McCoy they are doing their best to undermine it`s market value. I didn`t have 1200 dollars to buy one so I settled for silver coin which cost me 40 bucks. Nice coin but it would only buy a happy meal at McDonald`s.


Joseph Oppenheim said...

What is happening is a competitive currency devaluation, industrial countries trying to get an advantage over other industrial countries, by having weaker currencies so as to make their exports sell better and create/keep jobs.

These countries are in effect trying desperately to export their own deflation to other countries.

The greatest risk globally is an all-out massive deflationary economic collapse.

Luckily, at least for now, for the US, is that the world needs us to lead the global economy out of this mess, since we are the largest and most massive creator of demand for other countries exports.

The rest of the world needs us, even developing/emerging countries which have commodity-based economies.

Sure, a big risk is eventual high inflation for the US. However, fighting deflation is of utmost iumportance now - if we can't stop that - worse things will happen.

On the bright side - we have had modest success so far, and there is a real chance that we can head off the bad inflation as long as we do start generating jobs while at the same time restructuring our economy regarding energy, health care, science. and education, and set a plan for reducing deficit/debt. But, for now, trillions of US money/debt has been destroyed -asset prices - sure asset values aren't included in M1. M2, etc - but it is still money, albeit potential money, but nevertheless it takes away any near term risk of severe inflation.

It is deflation which is the biggest risk.

There is nothing wrong with a fiat currency as long as a country has valid assets backing it - like a healthy and educated workforce, great universities, a solid physical infrastructure, and other assets which make it a desirable country to live, visit, invest, etc.

It's a big challenge, but so far indicators show some good signs. And, anyone who understands behavioral economics, understands that public support is critical in calming financial markets and generating investment. And, right now, it is clear there is general public support, the people, in the US and around the world. The only real exceptions are the extremists, both on the Left and the Right, but so far moderates are in charge and they represent the real solid majority.

By the way, the stock market is officially in a new bull market - having risen over 20% from its lows. Sure, there is no guarantee how long it will last - it could end next week, and surely is due for a correction, but it is an important leading indicator. Financial markets key off of such things.


Anonymous said...

Joseph, you wrote:

"There is nothing wrong with a fiat currency as long as a country has valid assets backing it..."

Fiat currency enables the following: infinite government spending, enrichment of a few at the expense of many, funding endless "war" (terror, poverty, climate change, tobacco, drugs, etc.) and many other initiatives.

How can you have a sound economy based on unsound money?

Fiat functions as a medium of exchange, not a store of value. Ask anyone holding CDs.

Anonymous said...

i dont know if this helps

Anonymous said...

Joseph wrote: "There is nothing wrong with a fiat currency as long as a country has valid assets backing it."

Huh?! Fiat currency by definition isn't backed by assets. It's money by fiat or government or central bank dictum. If it was backed by assets (gold, produce, natural resources, commodities, etc.) it wouldn't be fiat currency.

Either Joseph works for the Federal Reserve or he have gross misunderstandings about basic economics... actually, now that I think about it, either of those are one in the same.

Bull market? I don't think so. Sucker's rally? Yes, I think so. This is just an uptick on what will be a secular bear market (possibly one of the longest in US history).

Minute periods of time in the stock market such as this uptick are insignificant. One must look at trends only for analysis... trends in increments of 1, 3, 5, 7 years.

With our fundamentals such as unemployment, continually crashing residential and commercial real estate, foreclosures, banks withholding their true asset values, government interference, consumer loan defaults, savings rate going up, consumerism dropping, etc. etc. etc. how could the stock market possibly trend upwards over the next few years?

Anonymous said...

Whatever they do you know the middle class, hard workers, savers, honest people who uphold their obligations, etc. are going to get screwed... and the governments, banksters, Wall Streeters, financial power elite, and all the other thieves will take the money and run.

Look at history. When have politicians or governments ever properly resolved an economic crisis in a country? Never. What makes you think it will change now?

A Realist

Anonymous said...

Joseph wrote a fine post, and instead of thanking him and learning from it, some are attacking him bc he brings a different but albeit important point of view.

One thing all the depression folks seem to miss is that this country has the world's greatest infrastructure, education, and health care system, thus making the most desirable place to live.

something i learned from someone really wise;
whenever you look at a country, judge it by whether people are dying to get in or dying to get out!
for now and at least another 20 years, the u.s. is the place to be. before some of you start saying china and emerging markets, try the air quality there, try the food there, etc.. and then we'll talk.

America will steer herself out of this mess. real unemployment is 20%, things are really bad in relative terms but are people out killing and looting!?

Jim said the market would implode in two to three days when this rally started, if you were sheep, you didn't make a dime, if you saw value in things like visa. mastercard, and mand made money.

think with a clear head, things aren't ever that bad or that good, somewhere in the middle. 99% of people have to be wrong and 1% right for you depression people to be right, very unlikely!

best of luck to all, to each his own, and time will tell ALL!


Anonymous said...

"things are really bad in relative terms but are people out killing and looting!?"

...not yet, but soon.

Jim in San Marcos said...

Hi Doc Hollywood

Unemployment is probably at least 15%, not the 20% you suggest, and I do agree that things are usually not as bad as they appear.

I don't see where my schedule of predictions has any three day predictions in it.

We have signed up for the "hand basket to Hell" tour but can we pay for it? The answer is no, the price is too high. You can't sell your soul for a pittance.

Once you realize that thing are getting worse, it is time to hold on an ride it out.

Thank you for your comments.

Chuck said...

How do I get invited to read the Link: Bubble Markets Inventory Tracking?

It says I haven't been invited.

Jim in San Marcos said...

Hi Chuck

If you give me an email (there is a link to my email on the links on the left hand side) I will shoot you his email address for securing a link.