Outlook: IMF gold sales

GOLD, IT seems, continues to arouse strong emotions. This is perhaps hardly surprising. No other commodity carries such historical and cultural baggage, with wars fought over it, men and women murdered for it, and monetary systems based on it.

Money in the western world is now almost entirely electronic, but there are still many places where gold is still the only safe asset to hold against civil unrest, corruption, banking insolvency and financial instability.

Even the UK has found it hard enough to sell the idea to a suspicious public of disposing of the official gold reserves, so it was always going to be more controversial still when the International Monetary Fund decided to follow suit. As the IMF's Stanley Fischer - South African born himself - has now admitted, falling gold prices harm the economies of the poor gold producing countries, and could cause massive social disruption for miners.

Mr Fischer is correct to argue that the IMF's planned gold sales can have played no more than a tiny part in the recent decline in the gold price. The market has known for more than two years that the Fund would eventually offload some of its gold reserves in order to finance debt relief, although the likely amount was unclear.

What's more, the gold price has been heading steadily downhill since the late-1970s, when it ceased to underpin the international monetary system. Even the UK's surprise announcement in May about the sale of gold reserves had only a small impact relative to the earlier, long-term decline.

However, the IMF's Plan B, to sell its gold off-market, will acquit it beyond doubt of the charge of contributing to the decline in the gold price and thereby undermining the poor countries it is supposed to be helping. Sales to central banks instead of an auction would have the added merit of forcing IMF members to contribute the funds needed to plug the gap in financing the G7 debt relief package.

The need for the Fund to sell gold only ever arose because member countries refused to contribute generously enough to debt relief in the first place.

The US Congress was always a particular hurdle to increased cash contributions to the IMF. So it is a pleasing irony that the gold fanatics in Congress will now have to welcome an increased US contribution through the backdoor of a Fed purchase of IMF gold.