GOLD UP-DATE September 20, 2010


Central banks continue to add gold to their holdings

Gold hit a record high on Friday for the third time this week as poor U.S. consumer confidence and market talk of more quantitative easing helped the yellow metal score its biggest weekly gain since May.

On Friday the gold price hit a new all time high of $1,280.80 an ounce at 3:00 p.m. in Singapore, on course for a 2.9-percent rise from a week earlier, the sharpest in more than 3 months. Gold futures for December delivery rose $4, or 0.3 percent, to $1,277.80 an ounce at 11:45 a.m. on the Comex in New York, after touching a record $1,284.40.

As the gold price surges ahead gold's safe haven status will increase mainly due to investor nervousness about monetary policy around the world, renewed sovereign debt concerns, uncertainty in global currency markets as well as worries about economic growth around the world.

The euro gained ground last week in a highly volatile forex market. The Basel Committee on Banking Supervision reached a compromise last weekend and agreed that banks will be required to hold top-quality capital totaling 7 percent of their risk-bearing assets, including a 2.5 percent buffer to withstand future stress. That's more than three times the current requirement of 2 percent. However, banks were given ample time to meet this requirement. There will be less than five years to comply with the minimum requirement and until January 1, 2019 to meet the buffer requirements.  The US dollar was sold off sharply last week as markets speculated that the US Fed will announce another massive quantitative easing program by the end of the year, and Japan finally intervened in the currency markets for the first time since 2004, a day after Prime minister Naoto Kan won party leadership election. The Swiss Franc tumbled after SNB left rates unchanged and lowered its inflation forecast and the New Zealand dollar weakened after RBNZ left rates unchanged at 3.00% as widely expected.

The lesson to take from this is that the relative values of all these fiat currencies can change on the smallest bit of news. And, as these currencies fluctuate, the price of gold is going to move higher as prudent investors sense that the current fiat system of currencies is faltering.  Gold acts as a barometer for the state of global currencies and the higher it goes, the greater the problems in global currencies.

As investors turn to gold to protect their wealth, it seems that central banks that were formerly keen sellers of the yellow metal are now reluctant sellers and also keen to add more gold to their reserves. Recently, Thailand raised its gold holdings by a fifth in July through open-market purchases, joining a growing list of Asian nations diversifying into gold amid volatility in other markets. Thailand increased its gold holdings to 3.2 million ounces in July from 2.7 million ounces in June, according to financial data published by the International Monetary Fund. Russia, China, Saudi Arabia, India, Mauritius have all increased their holdings in gold in the last year.

On September 09 The International Monetary Fund (IMF) announced the sale of 10 metric tons of gold to the Bangladesh Bank, the central bank of Bangladesh. The sale was conducted on the basis of market prices prevailing on September 7, 2010 with proceeds equivalent to US$403 million (SDR 266 million).

This transaction as well as the sale of gold to Thailand and other countries is part of the total sales of 403.3 metric tons approved by the Executive Board in September 2009 and it adds to the total sales to official holders of 212 metric tons made to the Reserve Bank of India, the Bank of Mauritius, and the Central Bank of Sri Lanka. As of end July 2010, a further 88.3 metric tons had been sold under the on-market sales announced in February 2010).

Almost one year ago, on September 18, 2009 The Executive Board of the International Monetary Fund (IMF) approved gold sales in a volume strictly limited to 403.3 metric tons, with these sales to be conducted under modalities that safeguard against disruption of the gold market. "I am delighted that the Executive Board has given its overwhelming backing to a strictly limited sale of Fund gold to put the financing of the IMF on a sound long-term footing, and enable us to step up much-needed concessional lending to the poorest countries," Managing Director Mr. Dominique Strauss-Kahn stated. "These sales will be conducted in a responsible and transparent manner that avoids disruption of the gold market. Most importantly, the sales are strictly limited to 403.3 metric tons, which is one-eighth of the Fund's total holdings, so the IMF will continue to hold a relatively large amount of its assets in gold."

The Second Amendment to the Articles of Agreement of the IMF in April 1978 fundamentally changed the role of gold in the international monetary system by eliminating the use of gold as the common denominator of the post-World War II exchange rate system and as the basis of the value of the Special Drawing Rights (SDR). It also abolished the official price of gold and ended the obligatory use of gold in transactions between the IMF and its member countries. It furthermore required that the IMF, when dealing in gold, avoid managing its price or establishing a fixed price.

Following the Second Amendment, the Articles of Agreement limit the use of gold in the IMF's operations and transactions. The IMF may sell gold outright on the basis of prevailing market prices, and may accept gold in the discharge of a member country's obligations (loan repayment) at an agreed price, based on market prices at the time of acceptance. The IMF does not have the authority under its Articles to engage in any other gold transactions-such as loans, leases, swaps, or use of gold as collateral-nor does it have the authority to buy gold.

The IMF acquired the majority of its gold holdings prior to the Second Amendment through four main types of transactions. First, when the IMF was founded in 1944 it was decided that 25 percent of initial quota subscriptions and subsequent quota increases were to be paid in gold. This represents the largest source of the IMF's gold. Second, all payments of charges (interest on member countries' use of IMF credit) were normally made in gold. Third, a member wishing to acquire the currency of another member could do so by selling gold to the IMF. The major use of this provision was sales of gold to the IMF by South Africa in 1970-71. And finally, member countries could use gold to repay the IMF for credit previously extended.

The IMF held 96.6 million ounces (3,005.3 metric tons) of gold at designated depositories at end January 2010, making it the third largest holder of gold in the world. The United States holds the largest gold reserve in the world which is estimated at some 8,133.5 tons. However, since there has not been an independent audit of this gold for decades and as there seems to be something sinister in the way the government continually refuses to allow an audit, I believe that the actual US gold holdings are only a fraction of this amount. (If this is correct, I doubt the US government will admit this because it would have huge damaging effects on the value of their current reserves).  With some 3143 tons, The Deutsche Bundesbank, Germany's central bank, holds the second most gold in the world. It is followed by the IMF then the by the Italian National Bank, Banca D'Italia, that has approximately 2,451.8 tons of gold in reserve. With the fifth largest gold reserve in the world, The Banque De France is responsible for France's gold holdings, which have been reported at about 2,450.7 tons. The sixth largest gold holdings in the world are held in SPDR Gold Shares a gold exchange traded fund that was introduced on the New York Stock Exchange some six years ago. The world's most populous country also has the world's seventh largest gold reserve. China which has some 1054 tons in their reserves had practically no gold some twenty years ago. The Chinese gold accounts for only 1.8% of the nation's total foreign reserves. The Swiss National Bank (SNB) has the next largest holdings of gold estimated at 1,040 tons of gold. In ninth position is Japan with 765 tons, and in the number ten slot is the central bank of the Netherlans, De Nederlandsche Bank which has some 612 tons of gold.


The gold price seems to have broken out to the upside of an ascending triangle formation. As long as the price holds above $1260, then we could expect to see the price test $1300 and then $1350.

About the author

David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

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Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.