Why Does the IMF Have Gold?
Gold sales from the IMF could help put its financing on solid footing and strengthen its ability to offer concessional balance of payments loans, as well as generate revenue for endowment funds.
The IMF stores its gold in designated depositories such as New York and London; their location rules were revised in April 1978.
It’s a relic of the gold standard
Gold held by the IMF is an invaluable source of financial strength and serves as a bulwark against creditor claims, yet even minor sales would not compromise its capacity to lend out to member countries.
IMF gold was acquired prior to the Second Amendment of its Articles of Agreement in April 1978, with profits from this pre-second Amendment gold used as collateral against concessional balance of payments loans for low income countries.
The International Monetary Fund is required to sell only a fraction of its gold each year to avoid creating disruptions in the global gold market. They take care to price sales so they are as close to current market price as possible and seek out liquid markets like US, London Singapore or Hong Kong for sales of their precious metals.
It’s a security
The IMF currently owns about 90.5 million ounces of gold stored at designated depositories. Most of this gold was acquired when the Fund first formed in 1944, when members paid 25 percent of their initial quota subscription in gold, then transferred it back as part of repayment obligations.
While its Articles of Agreement prohibit it from purchasing or lending gold directly, the IMF can sell its gold reserves to raise funds for low-income countries (LICs). Between 2009 and 2010, it sold 13 million ounces to strengthen its currency reserves and increase lending capacity for LICs.
IMF gold sales followed a “new income model,” wherein the bulk were sold off-market to central banks while any remaining sales were held through transparent market auctions over two years – these transactions caused no disruptions or disturbances in gold markets and were fully compliant with IMF Articles of Agreement.
It’s a hedge
Gold has long been recognized as an effective way to combat inflation, but it’s not the only means of diversifying one’s portfolio against risk. Some investors also utilize gold as an insurance policy against the volatility of stock markets or commodities prices.
IMF gold sales are subject to an elaborate set of regulations laid out in its Articles of Agreement. IMF gold was mostly acquired prior to the Second Amendment to its Articles, so any profits generated by its sales must only be used for activities consistent with the mission and objectives of the Fund. These services include concessional balance-of-payments assistance for low-income countries and helping those with severe external financing needs. From 1999-2000, the IMF sold approximately one eighth of its gold holdings. As part of its unique financing mechanism, the IMF utilized a two-step process in which it sold gold at market price before accepting it back at that same price in settlement of members’ financial obligations. This limited the impact on global gold markets while avoiding disruption.
It’s a store of value
Gold has increasingly become the focus of calls for the IMF to sell its reserves, especially given flat or reduced aid budgets. However, this raises questions as to whether market values outstrip its costs on the Fund’s books.
As part of its founding mandate in 1944, members paid 25 percent of their initial quota subscription in gold; later increases also included this payment method. To this day, over 90.5 million ounces are held by the IMF as an evidence of this legacy.
These holdings are stored at five designated depository banks (New York, London, Paris, Shanghai and Johannesburg). The IMF has sold on-market gold before with no disruption or effect on prices; for instance in 2009 when they announced ceilings for sales then gradually sold it over time, using profits generated from these sales as low-income country lending capital.
Categorised in: Blog