Last week we looked at the past sales of gold by the I.M.F. and the past reactions of other Central Bankers to outsiders pressing them to sell gold for ‘budgetary’ reasons. This week we look at the possibility of sales and how they might be handled, as well as the potential effects on the gold market.

The committee's key recommendations involve creating an endowment from ‘limited I.M.F. gold sales. 

"The limited sale of the IMF gold should be ring-fenced to exclude further sales and subject to strong safeguards to limit their market impact. Of its total stock of 3,217 metric tonnes of gold, the I.M.F. could sell the gold sold and repurchased in the 1999-2000 off-market operations. This gold, which amounts to about 400 tonnes, has an approximate current market value of S.D.R. 4.4 billion ($6.6 billion). Investment of profits from its sale could yield a real return of some S.D.R. 130 million ($195 million) a year.” The reason this particular gold was defined is that having been sold by Mexico and Brazil, its ownership can no longer be linked to an individual member, but lies in the ownership of all the members of the I.M.F. as a whole. Perhaps the committee felt that the members would not be so attached to this gold as much as they would their own gold?

But in the unlikely event that the sales were to come to pass, what would the procedure be? 

The Articles of Agreement limit the use of gold in the I.M.F.' operations and transactions as follows: - 

Transactions in gold require an 85% majority of total voting power. 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 on the basis of prices in the market at the time of acceptance. 

It does not, however, have the authority to engage in any other gold transactions, e.g., loans, leases, swaps, or use of gold as collateral, nor does it have the authority to buy gold.

The wording of the recommendations is critical for the potential modus operandi and these leave a great deal of scope for interpretation, so the pattern set by past sales and objections to gold sales by Central Bankers will guide us to possible future events: -

Past Sales & Objections.

Outflows of gold from the I.M.F.' holdings occurred under the original Articles of Agreement through sales of gold for currency, and via payments of remuneration and interest. Sales of gold for currency were as follows:

Sales for replenishment (1957-70). In the late 1950s and in the 1960s, the I.M.F. sold gold on several occasions to replenish its holdings of currencies. 

Investment in U.S. government securities (1956-72). In order to generate income to offset operational deficits, some gold was sold to the United States and the proceeds invested in U.S. government securities. A significant buildup of reserves through income from charges prompted the IMF to reacquire this gold from the U.S. government in the early 1970s.

South African gold and mitigation. In the early 1970s, the I.M.F. sold gold to members in amounts roughly corresponding to the amounts purchased earlier from South Africa. It also sold gold in connection with payments of gold for quota increases by some members, in order to mitigate the impact of these payments on the gold holdings of reserve centers. 

Thereafter the U.S. and the I.M.F. decided gold’s role in the monetary system was to be considerably lessened. This allowed the $ [the currency of oil and the new global reserve currency. Subsequent sales of gold should be seen in that light.

Auctions and "restitution" sales (1976-80). The IMF sold approximately one-third or 1,555 tonnes of gold (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. These auctions were oversubscribed to the extent that the I.M.F. realized their efforts to discredit gold were not meeting with the success they had hoped for. Hence these sales were terminated.

Off-market transactions in gold. In December 1999, the Executive Board authorized off-market transactions in gold of up to 14 million ounces to help finance I.M.F. participation in the HIPC Initiative, the scheme whereby poor countries debt would be written off. We cannot find evidence that these sales actually took place?

Between December 1999 and April 2000, separate but closely linked transactions involving a total of 400 tonnes [12.9 million ounces] of gold were carried out between the I.M.F. and two members (Brazil and Mexico) that had financial obligations falling due to the I.M.F. But this was not a sale into the open market, but an “internal sale”. In the first step, the I.M.F. sold gold to the member at the prevailing market price and the profits were placed in a special account and then invested for the benefit of the HIPC Initiative. 

In the second step, the I.M.F. immediately accepted back, at the same market price, the same amount of gold from the member in settlement of that member's financial obligations falling due to the Fund. The net effect of these transactions was to leave the balance of the I.M.F.' holdings of physical gold unchanged.

New Sales?

So what of new potential sales?

© 2007 Julian D. W. Phillips
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