IMFSurvey Magazine: Policy
Fund income and expenditure
IMF to Proceed with Limited Sales of Gold
By Glenn Gottselig
IMF Survey online
September 18, 2009
- Sales conducted under safeguards to avoid disruption of the gold market
- Essential part of IMF’s new income model
- Gold sale to boost IMF’s capacity to assist low-income countries
The Executive Board of the International Monetary Fund (IMF) has approved the sale of a limited portion of the institution’s gold holdings, stressing that the Fund will conduct the sales in a manner that does not disrupt the international gold market.
The Board approved the sale of up to 403.3 metric tons, or about one-eighth of the Fund’s total gold holdings. The proceeds will help finance a new income model for the IMF, making the 186-member institution less dependent on its lending revenue to cover expenses, which include surveillance of members’ economic and financial policies and other non-lending activities. Part of the money raised will also help boost financing for concessional lending to low-income countries.
“I am delighted that the Executive Board has given its overwhelming backing to limited gold sales to put the financing of the IMF on a sound long-term footing, and to enable us to step up much-needed concessional lending to the poorest countries,” Managing Director Dominique Strauss-Kahn stated. “These sales will be conducted in a responsible and transparent manner that avoids disruption of the gold market.”
Precautions to prevent market disruption
As the third largest official holder of gold after the United States and Germany, the IMF recognizes that it needs to pay close attention to the potential effect of its actions on the gold market. Certainly, unexpected large sales of gold could disrupt the gold market.
The IMF is therefore taking a number of precautions to prevent market disruptions. Importantly, a firm limit on the amount of gold to be sold has been set at 403.3 metric tons, and the gold market has been aware of this amount for some time, as it has not changed since the Executive Board endorsed the new income model in April 2008.
Transparency will play a key role in the gold sales, with the IMF set to inform markets before any sales on the gold markets begin. Prior to any sales on the market, the IMF would be prepared to sell gold directly to central banks or other official sector holders if they expressed interest. These sales to official sector holders would be conducted at market prices, and would shift official gold holdings without changing total official holdings.
Has the IMF sold gold before?
The IMF has sold some of its gold holdings on several occasions.
Following a 1978 amendment to its Articles of Agreement, the IMF may sell gold outright only on the basis of prevailing market prices, or 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.
Key gold transactions:
• Sales for replenishment (1957–70). The IMF sold gold 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). To generate income to offset operational deficits, the IMF sold some of its gold to the United States and invested the proceeds in U.S. government securities. Following a significant buildup of IMF reserves, the IMF reacquired 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 an 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 debt relief for poor countries.
Any gold sales on the market would be phased over time, following an approach similar to the one used successfully by the central banks participating in the Central Bank Gold Agreement.
Under this agreement, which was renewed in August, the participants announced ceilings on total sales of 400 tons annually, and 2,000 tons in total during the five years starting on 27 September 2009, and noted that the Fund’s sales can be accommodated under these ceilings.
As a result, on-market gold sales by the IMF will not add to the announced volume of official sales.
Regular external reporting on gold sales will also be provided to assure markets that the gold sales are being conducted in a responsible manner.
Gold sales key to new income model
The new income model is based on the January 2007 recommendations of the Committee of Eminent Persons to Study the Sustainable Long-Term Financing of the IMF that was chaired by Andrew Crockett. In its report the Committee identified a number of ways to redress shortcomings of existing income model.
The new income model aims to diversify the IMF’s income sources and to better align them with the variety of functions performed by the Fund. A key element of the new model is the creation of an endowment with the profits from gold sales.
The endowment would then be invested in a manner consistent with the public nature of the funds to be invested, and would generate income to help cover the Fund’s administrative expenses.
Low-income countries to benefit
Earlier this year, the IMF agreed to mobilize $17 billion through 2014 for lending to low-income countries, mostly in Africa, that have been hard-hit by the global crisis.
A financing package, which includes resources linked to these gold sales, has been agreed to generate the additional new subsidy resources of SDR 1.5 billion needed to help cover the cost of concessional interest rates on increased concessional lending by the Fund.
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