Monday, February 25, 2008

Gold in the IMF

Gold in the IMF
Gold played a central role in the international monetary system until the collapse of the BrettonWoods system of fixed exchange rates in 1973. Since then, the role of gold has been gradually reduced. However, it is still an important asset in the reserve holdings of a number of countries, and the IMF remains one of the largest official holders of gold in the world.
The IMF's gold holdings
The IMF holds 103.4 million ounces (3,217 metric tons) of gold at designated depositories. The IMF's total gold holdings are valued on its balance sheet at SDR 5.9 billion (about $9.2 billion) on the basis of historical cost. As of February 20, 2008, the IMF's holdings amounted to $95.2 billion (at then current market prices). A portion of these holdings were acquired since the Second Amendment of the IMF's Articles of Agreement in April 1978, amounting to 12.97 million ounces (403.3 metric tons), with a market value of $11.9 billion as of February 20, 2008. As noted below, this part of the Fund’s gold holdings is not subject to restitution to members.
The IMF acquired the majority of its gold holdings prior to the Second Amendment through four main types of transactions. First, it was then prescribed that 25 percent of initial quota subscriptions and subsequent quota increases were to be paid in gold. This represented the largest source of the IMF's gold. Second, all payments of charges (i.e., interest on members' use of IMF credit) were normally made in gold. Third, a member wishing to purchase the currency of another member could acquire it 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, members could use gold to repay the IMF for credit previously extended.
The IMF's policy on gold today
The Second Amendment to the Articles of Agreement in April 1978 eliminated 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 Right (SDR). It also abolished the official price of gold and brought to an end the obligatory use of gold in transactions between the IMF and its members. It furthermore required that the IMF, when dealing in gold, avoid managing its price or establishing a fixed price.
The Articles of Agreement now 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's obligations at an agreed price, based on market prices at the time of acceptance. These transactions in gold require an 85 percent majority of total voting power. The IMF does not have the authority 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 Articles also provide for the restitution of the gold the Fund held on the date of the Second Amendment to members of the Fund as of August 31, 1975. Restitution would involve the sale of gold to this group of members at the former official price of SDR 35 per ounce, with such sales made to those members who agree to buy it in proportion to their quotas on the date of the Second Amendment. A decision to restitute gold requires support from an 85 percent majority of the total voting power. The Articles do not provide for the restitution of gold the Fund has acquired after the date of the Second Amendment.
The IMF's policy on gold is governed by the following principles:
As an undervalued asset held by the IMF, gold provides fundamental strength to its balance sheet. Any mobilization of IMF gold should avoid weakening its overall financial position.
The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies.
The IMF has a systemic responsibility to avoid causing disruptions to the functioning of the gold market.
Profits from any gold sales should be used whenever feasible to create an investment fund, of which only the income should be used.
How and when the IMF used gold
Outflows of gold from the IMF's holdings occurred under the original Articles of Agreement through sales of gold for currency, and via payments of remuneration and interest. Since the Second Amendment of the Articles of Agreement, outflows of gold can only occur through outright sales. Key gold transactions included:
Sales for replenishment (1957–70). The IMF sold gold on several occasions during this period to replenish its holdings of currencies.
South African gold (1970–71). The IMF sold gold to members in amounts roughly corresponding to those purchased in these years from South Africa.
Investment in U.S. government securities (1956–72). In order to generate income to offset operational deficits, some IMF gold was sold to the United States and the proceeds invested in U.S. government securities. Subsequently, a significant buildup of IMF reserves prompted the IMF to reacquire this gold from the U.S. government.
Auctions and " restitution" sales (1976–80). The IMF sold approximately one third (50 million ounces) of its then-existing gold holdings following an agreement by its members to reduce the role of gold in the international monetary system. Half of this amount was sold in restitution to members at the then-official price of SDR 35 per ounce; the other half was auctioned to the market to finance the Trust Fund, which supported concessional lending by the IMF to low-income countries.
Off-market transactions in gold (1999–2000).In December 1999, the Executive Board authorized off-market transactions in gold of up to 14 million ounces to help finance IMF participation in the Heavily Indebted Poor Countries (HIPC) Initiative. Between December 1999 and April 2000, separate but closely linked transactions involving a total of 12.9 million ounces of gold were carried out between the IMF and two members (Brazil and Mexico) that had financial obligations falling due to the IMF. In the first step, the IMF sold gold to the member at the prevailing market price and the profits were placed in a special account invested for the benefit of the HIPC Initiative. In the second step, the IMF immediately accepted back, at the same market price, the same amount of gold from the member in settlement of that member's financial obligations. The net effect of these transactions was to leave the balance of the IMF's holdings of physical gold unchanged.

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