Why Gold Is Important to the International Monetary Fund
Gold has historically played a central role in international monetary systems. When countries pegged their currency rates to gold, they often paid IMF subscriptions in gold.
IMF Executive Board approved sales strictly limited to gold acquired prior to April 1978 when they passed Second Amendment of Articles amendment. Profits generated by sales will help bolster low-income country lending through PRGT.
What is the IMF’s gold reserve?
At one time, the IMF’s gold reserve served two functions: storing members’ reserves and providing an outlet for gold when members needed to repay loans from the Fund. But as more nations unlinked their currencies from gold reserves, rules were revised accordingly to reflect these shifts in demand for IMF loans.
Under current rules, profits from gold sales are transferred to the Fund’s Special Disbursement Account and used for balance of payments operations consistent with “the purposes of the Fund”, as outlined in its Articles of Agreement. All gold sold must be converted into bars that meet certain fineness and weight specifications – minimum.995 fineness with 400 oz weight – specified by the Fund.
In 2009, the IMF Executive Board decided that on-market sales of its remaining gold would begin shortly. Proceeds from these sales and associated contributions to the Poverty Reduction and Growth Trust will be used for low-income member support through PRGT; this package will increase IMF concessional lending capacity by 11.3 billion SDR between 2009-2014.
Why is the IMF’s gold reserve important?
IMF gold reserves are essential to global financial stability as they provide central banks with a safe haven during times of stress and political unpredictability. Furthermore, gold in IMF vaults serves as a balancer against imbalances among official reserves among members and provides stability support for global exchange rates.
Gold comprises approximately 17 percent of official reserves in advanced economies and 7 percent in EMDEs on average (Figure 1). Some countries hold significantly larger shares; Portugal, Kazakhstan, Germany, Italy and Uzbekistan all boast 60% or higher deposits of gold reserves respectively.
Gold sales by the IMF will help strengthen its financing on a firmer long-term foundation and expand its capacity to offer low-interest concessional loans to poor countries at concessional interest rates. Resources related to gold sales will also contribute to an income model approved by its Executive Board in April 2008.
How is the IMF’s gold reserve used?
Due to global economic and financial turmoil, there is renewed interest in gold as a reserve asset. While most official reserves belong to advanced economies, the IMF has sold some of its reserves recently in order to strengthen currency holdings and increase lending to low-income countries.
These limited sales were key components of the new income model approved by the IMF Executive Board in April 2008, helping put its financing on a sustainable long-term path. Furthermore, proceeds from sales will support an increase in capacity to provide concessional balance of payments loans to low-income countries.
Under its Articles of Agreement, profits from IMF gold sales are disbursed through a Special Disbursement Account (SDA), where they will be utilized for operational activities consistent with its purposes and then immediately made available for lending by members.
What is the IMF’s gold reserve worth?
Before the late 1970s, many countries linked their currencies and paid interest owed on IMF loans in gold as collateral when borrowing. As central bank reserves became increasingly invested in financial assets rather than gold reserves, their share has decreased and some have suggested that the IMF should sell off some of its holdings to assist Africa and other low-income countries (LICs) promote growth and reduce poverty.
The IMF values its gold holdings at SDR 35 per ounce, or roughly $50 an ounce, on its books. As market prices for gold are significantly higher than this valuation, selling some of their reserves could yield significant profits, which could help pay for support to low-income countries during the Covid-19 pandemic as well as contributing resources towards its special financing mechanism for low-income countries. Any sales should be limited in size to protect its ability to support creditor claims against it and prevent disruption in gold markets.
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