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Imf gold policies { January 31 2003 } Original Source Link: (May no longer be active)
http://www.imf.org/external/np/exr/facts/gold.htmhttp://www.imf.org/external/np/exr/facts/gold.htm
Gold in the IMF
A Factsheet
April 2003
Before the Second Amendment of the Articles of Agreement in April 1978, the role of gold in the international monetary system was central and pervasive. The Second Amendment contained a number of provisions that, in combination, were intended to achieve a gradual reduction of the role of gold in the international monetary system and in the IMF. However, gold is still an important asset in the reserve holdings of a number of countries, and the IMF remains one of the largest official holders of gold in the world.
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What are the IMF's total gold holdings?
The IMF holds about 103 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 $8.1 billion) on the basis of historical cost.As of January 31, 2003, the IMF's holdings amounted to some SDR 27.8 billion ($38.3 billion) at then current market prices.
How did the IMF acquire its holdings of gold?
The IMF acquired virtually all its holdings of gold through four main types of transactions under the original Articles of Agreement:
* Subscriptions. The original Articles of Agreement prescribed that 25 percent of initial subscriptions and quota increases was normally to be paid in gold. This represented the largest source of the IMF's gold.
* Payment of charges. Originally, all charges, i.e., interest on members' outstanding use of IMF credit, were normally payable in gold.
* Purchases. A member wishing to obtain 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.
* Repurchases. Members could use gold to repay the IMF for credit previously extended.
What changed under the Second Amendment?
The Second Amendment to the Articles of Agreement, which came into effect in April 1978, eliminated 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 SDR. The Amendment also abolished the official price of gold and abrogated the obligatory uses of gold in transactions between the IMF and its members. It furthermore required the IMF, in its dealings in gold, to avoid managing its price or establishing a fixed price.
The Articles of Agreement now 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's obligations at an agreed price on the basis of prices in the market at the time of acceptance. These transactions in gold require an 85 percent majority of total voting power. The IMF does not 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.
What is the IMF's policy on gold?
The IMF's policy on gold is governed by the following principles:
* As an undervalued asset held by the IMF, gold provides fundamental strength to its balance sheet. Any mobilization of IMF gold should avoid weakening its overall financial position.
* Gold holdings provide the IMF with operational maneuverability both as regards the use of its resources and through adding credibility to its precautionary balances. In these respects, the benefits of the IMF's gold holdings are passed on to the membership at large, to both creditors and debtors.
* The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies.
* The IMF has a systemic responsibility to avoid causing disruptions to the functioning of the gold market.
* Profits from any gold sales should be used whenever feasible to create an investment fund, of which only the income should be used.
How and when did the IMF use gold?
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. Since the Second Amendment of the Articles of Agreement, outflows of gold can only occur through outright sales. Sales of gold for currency have taken place as follows:
* Sales for replenishment (1957-70). In the late 1950s and in the 1960s, the IMF sold gold on several occasions to replenish its holdings of currencies.
South African gold and mitigation. In the early 1970s, the IMF 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.
* 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.
* 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 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.
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 IMF participation in the 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 and then 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 falling due to the Fund. The net effect of these transactions was to leave the balance of the IMF's holdings of physical gold unchanged.
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