The large purchase of Gold from the IMF by India, and China’s efforts to amass gold through purchase and mining, indicates a waning confidence in the their US dollar reserves. Several countries may be interested in following India and China’s lead by buying the remaining gold for sale by the IMF. See the following article from Commodity Online for more on this.
Not a single day passes, perhaps, without the bullion markets around the world discussing gold reserves, the yellow metal price boom and which country will next buy gold from the International Monetary Fund (IMF). Why is IMF gold a hot commodity these days?
Ever since India bought 200 tonnes of gold from IMF last month, there have been heated discussions and speculation that several countries and central banks around the world are queuing up to amass gold from IMF in an attempt to build their foreign exchange reserves in the wake of weakening US dollar. Most countries including India and China—the two largest gold consuming nations in the world—have US dollar as most part of their foreign exchange reserves kitty. Now, China, India and other countries want to move away from dollar to gold, for all perceive gold as a stable currency than a hot commodity!
The most aggressive player in the gold reserves game these days is, of course, China. Though China is not keen to buy gold from IMF at the high price that gold is ruling these days, the People’s Bank of China is stepping up efforts to build up gold reserves by buying the yellow metal from the market and taking various initiatives to increase gold mining across the country. China has targeted to mop up a whopping 10,000 tonnes of gold reserves by 2020.
Which are the countries that own the largest quantity of gold reserves now? Check out here:
- America is the world leader in gold reserves. The United States has 8133 tonnes of gold reserves as on September 2008 that accounts for 76.5% of its foreign exchange reserves.
- Germany has the second highest gold reserves at 3412.6 tonnes.
- France has 2508 tonnes of gold constituting 58.7% of its forex assets.
- Italy has 2451.8 tonnes of gold constituting 61.9% of forex reserves.
- China became the fifth biggest holder of gold reserves with 1054 tonnes.
- Switzerland has 1040 tonnes of gold reserves constituting 23.8% of total forex reserves.
- India which recently bought 200 tonnes of gold from IMF has 557 tonnes of gold reserves representing 3% of total forex reserves.
- The IMF, which currently holds 3,217 tonnes of gold, is the third-largest official holder of the precious metal. The IMF has made gold sales a key element of its new income model aimed at lowering its dependence on lending revenue to cover expenses.
I have been getting lots of e-mails asking for details on what is this fuzz all about IMF gold and how is it that the international organization possesses gold. Following is a brief on IMF gold holdings, culled out from the IMF documents:
How did IMF acquire 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 August 28, 2009, the IMF’s holdings amounted to $98.8 billion at current market prices.
A portion of these holdings was acquired after the Second Amendment of the IMF’s Articles of Agreement in April 1978. This portion, amounting to 12.97 million ounces (403.3 metric tons) with a market value of $12.4 billion as of August 28, 2009, is not subject to restitution to IMF member countries (see below), unlike gold the IMF acquired before 1978.
The IMF acquired the majority of its gold holdings prior to the Second Amendment through four main types of transactions.
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- 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’s legal framework for gold
Role of gold. The Second Amendment to the Articles of Agreement 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 Right (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.
Transactions. 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. Such transactions require Executive Board approval by an 85 percent majority of the total voting power. 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.
Restitution. The Articles also provide for the restitution of the gold the Fund held on the date of the Second Amendment (April 1978) to those countries that were members of the Fund as of August 31, 1975. Restitution would involve the sale of gold to this group of member countries 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.
How and when the IMF has used gold in the past
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. As noted, 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 to replenish its holdings of currencies.
- South African gold (1970–71). The IMF sold gold to member countries in amounts roughly corresponding to those purchased from South Africa during this period.
- 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 member countries to reduce the role of gold in the international monetary system. Half of this amount was sold in restitution to member countries 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 the IMF’s 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. In the end, these transactions left the balance of the IMF’s holdings of physical gold unchanged.
The IMF’s strictly limited gold sales approved in September 2009
On September 18, 2009, the Executive Board approved the sale of 403.3 metric tons of gold (12.97 million ounces), which amounts to one-eighth of the Fund’s total holdings of gold. In accordance with the priority of avoiding disruption of the gold market, the Executive Board adopted modalities for the gold sales consistent with guidelines it had earlier established (see below).
This decision is a key step in implementing the new income model agreed in April 2008 to help put the IMF’s finances on a sound long-term footing. A central component of the new income model is the establishment of an endowment funded by the profits from the sale of a strictly limited portion of the Fund’s gold, being the gold the Fund has acquired after the Second Amendment of the Articles. In July 2009, the Executive Board agreed that resources linked to gold sales would also help boost the Fund’s concessional lending capacity.
In August 2009, the European Central Bank and other central banks announced the renewal of their agreement (Central Bank Gold Agreement) on gold sales, which are not to exceed 400 metric tons annually and 2,000 metric tons over the five years starting on September 27, 2009. The announcement notes that sales of 403 tons of gold by the IMF can be accommodated within these ceilings. This ensures that gold sales by the Fund would not add to the announced volume of sales from official sources.
Executive Board guidelines for gold sales
The IMF’s Executive Board has reaffirmed the long-standing principle that the Fund has a systemic responsibility to avoid causing disruptions that would adversely affect gold holders and gold producers, as well as the functioning of the gold market. To that end, in February 2008, the Board endorsed the following guidelines to govern the envisaged gold sales:
(i) Sales should be strictly limited to the amount of gold that the Fund has acquired since the Second Amendment of the Articles of Agreement (12,965,649 fine troy ounces or 403.3 metric tons, which represent one-eighth of the Fund’s total holdings).
(ii) The Fund’s gold sales should not add to the announced volume of sales from official sources.
(iii) The scope for sales of gold to one or more official holders should be explored. This would be advantageous because such transactions would redistribute official gold holdings without changing total official holdings. There would also be the practical advantage that the Fund could receive sales proceeds earlier, thereby beginning to generate income from an endowment sooner.
(iv) Absent sufficient interest from other official holders to purchase gold directly from the Fund, phased on-market sales would represent the most appropriate modality for potential gold sales. This would follow the approach adopted successfully over a number of years by current Central Bank Gold Agreement participants.
(v) A strong governance and control framework, together with a high degree of transparency, would be essential for gold sales conducted by the Fund. A clear, transparent communications strategy, including regular external reporting on sales, should be adopted, in order to assure markets that the gold sales are being conducted in a responsible manner.
Good piece of info, indeed. IMF has on sale 403 tonnes of gold; India has already bought 200 tonnes out of this yellow metal basket. Central Banks around the world are chalking out plans to buy the remaining 203 tonnes of gold from IMF. They include central banks in India, China, Russia, Sri Lanka, Brazil….
This article has been republished from Commodity Online. You can also view this article at Commodity Online, a commodity news and analysis site.