A few weeks ago while researching for a report I created three charts of gold held by the International Monetary Fund (IMF and the Bank for International Settlements (BIS) vs the price of gold. I was stunted to see such a clear picture of correlation between the sale of gold by the IMF and the recent gold bear market. I posted the three charts on my website without any comment. In my opinion the first chart spoke by itself.
Correlations are meaningless by themselves. I can find a correlation between things that are unrelated and jump to false conclusions. Correlations usually are also done only between two variables as if other variables did not matter. However, we should not dismiss them out of hand. I asked myself first if the IMF sales were related to the BIS purchases. We know that most central banks and the IMF sell their gold through the BIS in Basel, Switzerland.
Reading the IMF website section on gold holdings it sais that, “On September 18, 2009, the Executive Board approved the sale of 403.3 metric tons of gold (12.97 million ounces)—one-eighth of the Fund’s total holdings of gold at that time. This move was part of a new income model agreed in April 2008 to help put the IMF’s finances on a sound, long-term footing.” The words “agreed in April 2008” attracted my attention. It was just after the financial crisis of 2007–08. Coincidence? I doubt it. We know that the IMF is in close relation with the central banks and that they have regular meeting.
Some will argue, as the IMF does on its website, that those sales will not affect the gold market since they are done off the market to world central banks. The IMF confirms this by stating on its website that, “The first phase in the Fund’s gold sales was exclusively off-market transactions to interested central banks and other official holders, at market prices. In October and November 2009, the Fund sold 212 metric tons of gold in separate off-market transactions to three central banks: 200 metric tons were sold to the Reserve Bank of India; 2 metric tons to the Bank of Mauritius, and 10 metric tons to the Central Bank of Sri Lanka.” Further it states that, “In February 2010, the IMF announced the beginning of sales of gold on the market. At that time, a total of 191.3 tons of gold remained to be sold. In order to avoid disrupting the gold market, sales were phased over several months. In December 2010 the IMF concluded the gold sales program with total sales of 403.3 metric tons of gold (12.97 million ounces).”
It is evident that the sale of gold by the BIS coincides with the beginning of the the gold bear market. It is also naïve to think that off the market sales do not influence the market price. There is not even a need to actually execute the sale but only an announcement is sufficient to influence the market price. Similar announcements were done without an actual sale by the IMF and the Westerns central banks in the 80s and 90s pushing the gold price as low as $252.8 on July 1999. In 1999 the UK not only sold 450 tonnes of official gold reserves but preannounced it to the market in advance which created what we call since then the “Brown bottom”. The UK sale coincided with the end of the gold bear market as you can see in the chart bellow.
The last chart indicates that all the IMF gold was sold by BIS and the price seems to have bottomed at the same time.
Could this indicate the end of this gold bear market again? It could. Since the beginning of 2016 gold gained in all the major currencies. Developing countries and in particular Russia and China continue to buy large amounts of gold for their official forex reserves and at the same time individuals worldwide continue to also buy large amounts of gold coins.