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"Gold To Remain In IMF Reserves
Business Wire - July 22, 1998 07:16
%WORLD-GOLD-COUNCIL %IMF %NEW-YORK %MINING %METALS V%BW P%BW
IMF Unlikely To Sell Significant Amount
The International Monetary Fund (IMF), the world's second largest holder of gold reserves, is highly unlikely to sell a significant amount of its gold in the immediate future, it is claimed in a report published today.
In a wide-ranging study entitled the "IMF and Gold," Dick Ware, of the Center for Public Policy Studies of the World Gold Council, says that although gold no longer has an official role within the international monetary system, it continues to serve an important function in underpinning the IMF's financial strength. Among other things the presence of gold on the IMF's balance sheet provides reassurance to countries whose currencies are used in fund lending operations.
The IMF currently holds 3,217 tons of gold, worth $31 billion at a price of $300 an oz. This is about 10% of the gold held in the official sector and around 2.5% of the total stock of gold worldwide. "What the IMF does with its gold is clearly of vital interest to anyone with a stake in the gold market -- miners, trades, manufacturers and consumers," said Ware.
The fund is no longer permitted to buy gold and its options, therefore, are limited to selling some or all of it or simply "sitting on it." There have been suggestions that the IMF should sell its gold, but they have failed, with limited exceptions, to gain the necessary support of the membership, since an 85% majority is needed for any sale of the fund's gold.
"It has remained the majority view that it is better for the fund to preserve its gold against unknown contingencies rather than sell it to invest the proceeds elsewhere," said Ware. "International monetary officials are often more comfortable if they have something tangible with which to confront any unforeseen crisis. Gold provides such real support."
"Certainly this moment, there is little prospect of the fund's membership, as reflected in the Board of Executive Directors, agreeing to an outright sale of the majority of the fund's gold. There are enough important members who hold gold in their national reserves - and see the good reasons for doing so - to prevent this happening," said Ware.
The fund is still considering the possibility to sell a small amount of the fund's gold - up to five million ounces - to help with the debt reduction plan for the world's poorest countries; and another proposal to sell up to three million ounces of gold to cover late or defaulting loan repayments to the fund's Enhanced Structural Adjustment Facility (ESAF).
These potential sales have been agreed to in theory by the membership, but it is by no means certain that they will happen in practice.
Fund members would undoubtedly be concerned at the prospect of similar operations continuing, with the ultimate possibility of the fund being left with no gold at all. There are significant reasons why gold remains important to the fund. Piecemeal initiatives which continually eat into the stock will undermine its fundamental raison d'etre.
Ware added that it was important to be clear about the positive reasons for the fund continuing to maintain its existing stock of gold.
"An underlying factor to bear in mind - one which has a direct bearing on any fund member which holds gold in its national reserves - is that fund sales could affect the value of others' outstanding holdings. But it goes beyond that, since the price of gold - influenced by any significant market operations - will affect the viability of the gold mining industry in those countries which mine it," Ware said.
"Although the major producers are mainly developed countries, there are a number of countries with small producers by world standards, which are nevertheless important in terms of the country's income and employment. Any actions taken by the fund which might be detrimental to the gold price could therefore have an impact on the economies of a number of its members. Highly unlikely though it may be, at the extreme a fall in the gold price could be the last straw which forced a country to approach the fund for resources," Ware added.
Gold is held by the fund at the old official price of SDR35 to the ounce ($42.22) and is therefore a significantly undervalued asset on the fund's balance sheet, and consequently the fund's financial position is stronger than it appears. Gold adds a "fundamental strength" to the balance sheet which may be important in years to come.
"As has been seen frequently in recent years, the nature and extent of financial shocks are unknowable. Although they have tended to equate to problems in individual (large) countries, it is not beyond the bounds of possibility that in future they might involve the whole system. In such an instance, the fact that the fund owns gold could become an important factor in the equation."
"Difficult though it may be to forsee at the moment, who knows what a future international exchange rate system might comprise?" Ware asked.
Note:
The IMF and Gold - Research Study no. 20, is one of a series of reports published by the World Gold Council on a number of wide-ranging issues of importance to the international gold market and all those involved in it. Copies of this report and of a full list of other reports are available from the WGC, 444 Madison Ave., Ste. 301, New York, NY 10022. Telephone 212/317-3848.
The World Gold Council is an international organization formed and funded by leading gold mining companies from around the world to increase the demand for gold. The countries served by the Council account for approximately 80% of global gold demand.
CONTACT: World Gold Council
George Milling Stanley, 212/317-3848
or Centre for Public Policy Studies, WCG
Dick Ware, 01-71-930-5171"
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