IMF Gold Sales Could Be Bad News for the Dollar

Gold hit a record high price today of $1,085.07 an ounce today after the International Monetary Fund announced that it had completed the sale of 200 tons of gold to India. The transaction took place over a period of two weeks and at an average price of $1,045 an ounce, the sale added nearly $6.7 billion to help boost the IMF’s finances.

According to the IMF’s press release, the deal with India represents only about half of the total amount of gold the IMF intends to sell. This immediately kicked off speculation over who would emerge as the buyer for the remaining quota.

Most analysts believe the likely destination to be either China and/or Russia, and this makes sense as they are among the few countries still holding excess reserves these days. Also, both have been front and center in voicing their displeasure with US monetary policy that they blame for devaluing the US dollar, and by extension, the value of their currency reserves.

To back up their accusations, both countries have made very public moves lately to diversify their holdings in an attempt to reduce their dependency on the buck. Russia recently gave the Euro a vote of confidence by making it the cornerstone of its currency reserves, boosting its Euro-backed holdings to 47.5 percent of its total currency reserves estimated to be in the vicinity of $540 billion. The dollar has since been relegated to second place and now represents only 41.5 percent of Russia’s currency assets. China meanwhile, nearly doubled its gold reserves earlier this year to 1,054 tons, but still remains the number one foreign holder of US currency with nearly half of its $2 trillion worth of foreign reserves still maintained in US-denominated cash and securities.

Now this is where it gets interesting. The US government is currently running a deficit in the range of $1.5 trillion (depending on who you ask) and relies on the sale of Treasury Bills to bridge the funding gap. China has been the primary source of funding but if China decides to buy more gold at the expense of the dollar, this could place the US government in the difficult position of having to raise interest rates to persuade China to continue buying dollars. Obviously, this would add even more to America’s overall debt which is now close to $12 trillion and shows no sign of slowing – indeed, just servicing its debt, now accounts for ten percent of America’s annual budget.

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