IMF sells gold
Today (9th April 20008) there is news
about International Monitory Fund (IMF) selling about 12% of its gold reserves
(403.3 tonns i.e. 4,03,300 Kg ). Some details I gathered from net.
Bits fromwww.imf.org (information is gathered from various
pages of website and rearranged to create a flow )–
The
IMF is an international organization of185 member countries.
It wasestablished to promote international monetary cooperation,
exchange stability, and orderly exchange arrangements; to foster economic
growthand high levels of employment; andto provide temporary
financial assistance to countriesto help ease balance of payments
adjustment.
The
IMFholds 103.4 million ounces (3,217 metric tons) of goldat
designated depositories.
As
of February 20, 2008, the IMF's holdingsamounted to $95.2
billion(at then current market prices).
The
IMFacquired the majority of its gold holdings through four main
typesof transactions.
First,
it was then prescribed that 25 percent of initial quota subscriptions and
subsequent quota-increases were to be paid in gold. This represented the
largest source of the IMF's gold. Each member country of the IMF is assigned a
quota, based broadly on its relative size in the world economy. A member's
quota subscription determines the maximum amount offinancial
resourcesthe member is obliged to provide to the IMF. A member's
quota determines its maximum financial commitment to the IMF and its voting
power, and has a bearing on its access to IMF financing. Quota subscriptions
generate most of the IMF's financial resources.
Second,
all payments of charges (i.e., interest on members' use of IMF credit) were
normally made in gold.
Third,
a member wishing to purchase the currency of another member could acquire it 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,
members could use gold to repay the IMF for credit previously
extended.
However,
the IMF's Articles of Agreement strictly limit its use. Under some
circumstances, the IMF may sell gold or may accept gold as payment by member
countries; but the IMF is prohibited from buying gold or engaging in other gold
transactions.
Then why sell now?
The
International Monetary Fund's executive board has approved a
broad financial overhaul plan that could lead to the eventual sale of a little
over 400 tons of its substantial gold supplies.
IMF Managing Director
Dominique Strauss-Kahn welcomed the board's decision Monday to propose a new
framework for the fund, designed to close a projected $400 million budget
deficit over the next few years.
The budget proposal includes
sharp spending cuts of $100 million over the next three years that will include
up to 100 staff dismissals.
The IMF said the board
agreed to revamp the fund's income model from one that primarily relies on
lending to one that generates money from various sources.
During the 1990s, the IMF
lent billions to countries in Asia and Latin America that were facing financial
crises and financed its operations on interest from those loans. In recent
years, IMF lending has dried up as many of those countries have built up
reserves to prevent them from having to borrow again from the IMF, which often
puts severe restrictions and conditions on its loans. The declining interest
payments led to the IMF's budget gap.
Actual sale of the gold
cannot start immediately because the U.S. member on the IMF board cannot vote
for it until Congress approves.Congress has made approval
conditional on a broad range of operational changes that Strauss-Khan has
pledged to carry out to preserve the relevancy of the 64-year-old organization,
whose mission is to promote global financial stability.
Under the plan, the IMF
would sell the 403 tons, or nearly 13 million ounces, of gold for about $11
billion over several years. The IMF would keep $4.4 billion on its books, and
the remaining $6.6 billion would go into an investment
account.
The IMF, which has sold gold
before, said it would coordinate the sales with central banks in an effort to
prevent market disruptions.
Strauss-Khan, who took over
last November as head of the IMF, said the financial overhaul was another major
step in the organization's reform process. It followed a decision last month to
slightly increase the voting power of rapidly developing countries such as
China, India and Brazil, who are playing a growing role in the world economy.
Since its founding, the United States and European nations have dominated IMF
decision-making.
Besides using the gold sales
to produce an income stream, the fund's narrow investment authority will be
broadened.
The International Monetary
Fund said it would sell more than 14.2 million ounces of gold, currently valued
at more than $13 billion, and cut substantial costs as part of an efficiency
drive.
The news helped pressure
the price of gold Tuesday on the New York Mercantile Exchange. The benchmark
futures contract for gold finished at $918 an ounce, down $8.80, or
1%
Some gold analysts say the
IMF sale, if approved, should be readily absorbed by the market.
In a statement Monday,
Managing Director Dominique Strauss-Kahn said the IMF had made "difficult but
necessary choices" to close an income shortfall pegged at about $400 million by
fiscal 2010 and to make the multilateral agency more efficient through a "new
and sustainable income and expenditure framework."
The proposal to sell gold
faces at least two key hurdles. One is that the U.S. Congress must approve the
proposal, and most member countries also will have to enact legislation to
expand the IMF's investment authority.
Assuming the changes win
approval and are implemented, the IMF's income model would be based largely on
generating funds from various sources rather than relying on lending, the
agency said.
Its holdings make the IMF
the third-biggest official holder of the precious metal.
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