The IMF is essentially an institution that plays an important role in the world’s economic and monetary systems. Conceived in 1944 in the United States and established in 1946, the fund’s duty is to foster monetary stability as well as facilitate trade between member countries. To achieve this goal, the IMF implements policies aimed at averting economic and financial crises. In addition, it has sold some of the gold reserves in its possession for various reasons over the years. Keep reading to learn more about the sales history of this precious metal.
Source of Gold Reserves
After its establishment, the IMF’s main purpose was to oversee and regulate a par value exchange rate system. Remember this happened during the era of the Bretton Woods monetary system. This system consisted of two main levels: gold and dollar monetary regimes. This meant that member countries could use the dollar or gold to benchmark the value of their currencies. The United States benchmarked its currency using this precious metal. At that time, the US set the value of one ounce of gold to $35. In general, the entire monetary system had some form of gold backing.
In addition, member countries were required to pay 25% of their quota subscriptions using gold. When the fund required member countries to increase their quota subscriptions, payments were in the form gold. Countries that accessed financing from the fund were required to make interest payments in gold.
During this period, a member country could acquire the currency of another country by selling gold to the fund. Countries could also pay outstanding loans extended by the IMF using gold. All of this allowed the International Monetary Fund to amass huge amounts of this precious metal. The good news is that the IMF does not just hoard all the metals it has acquired. It has sold some of it over the years.
Starting from the 1950s to the 1970s, the fund sold gold to replenish its reserves and get money to pay off some of its debts. From 1956 to 1972, it sold some of the precious metals in it held for purposes of paying off some of its operational deficits. In 1970 and 1971, it sold as much gold as it bought from South Africa. Auctions totaling 50 million ounces also took place from 1976 to 1980. Unlike the earlier sales, these auctions took place after member countries agreed to cut reserves held by the fund.
Proceeds from 25 million ounces went towards concessional lending to low-income countries. Member countries snapped up the remaining 25 million ounces. Although the International Monetary Fund has mostly undertaken market transactions, it has also engaged in off-market sales. One of these transactions took place in 1999 to 2000 after authorization by the Executive Board. At this time, the IMF participated in an off-market transaction totaling 14 million ounces.
The money raised from this transaction went towards financing the IMF’s Heavily Indebted Poor Countries (HIPC) Initiative and some of the countries that participated in this off-market transaction included Brazil and Mexico. The most recent gold sales occurred in 2009 to 2010. Once again, the Executive Board gave approval for the sale of 403.3 million tons of precious metals it held. A large chunk of the precious metals sold during this period went to Reserve bank of India (200 metric tons).
Other participants involved in this transaction included the Central bank of Sri Lanka (10 metric tons), the Bank of Mauritius (two metric tons) and the Bangladesh Bank (10 metric tons). In most cases, the fund phases on-market transactions to ensure it does not cause disruptions to the supply and demand cycle. This could negatively affect the spot price of this precious metal. In total, the fund realized $15 billion or SDR 9.5 billion from gold sales approved in 2009.
Impact of these Sales
The impact of these sales is twofold: it reduces the IMF’s gold reserves while increasing its cash deposits. In theory, such sales only affect the composition of assets while total net worth remains the same. However, this is not the case because the International Monetary Fund values precious metals it holds using historic prices. In fact, the fund has acknowledged this fact in a report published by its Statistics Department. Moreover, off-market and on-market transactions rely on the prevailing price of gold. The good news is the International Monetary Fund has used some of the proceeds from these sales to fight poverty especially in low and middle-income countries. For instance, the fund has used these funds to support the Poverty Reduction and Growth Facility as well as the Heavily Indebted Poor Countries Initiative.
Besides poverty eradication, the IMF has also distributed profits generated from these sales to member countries. It has also invested sales proceeds in income generating projects. Figures published by the IMF show that its aim was to raise the level of funds available for concessional lending to low-income countries to $17 billion starting from 2009 through 2014. This money would go to the Poverty Reduction and Growth Trust (PRGT). Profit distributions to member countries in 2012 totaled $1.1 billion or SDR (Special Drawing Right) 700 million.
In spite of selling a portion of the gold it has, the International Monetary Fund still has plenty in store. According to its own figures, it has approximately 2,814.1 metric tons spread out across various depositories. Take note that the IMF cannot just sell precious metals in its custody whenever it feels like doing so. There are strict checks and balances governing such transactions set out in its Articles of Agreement. Furthermore, the Executive Board has to deliberate and approve a decision to sell any of its precious metal reserves.
The IMF has a history of selling precious metals to raise cash funds for diverse purposes. Charities such as Oxfam have petitioned the fund to sell some of its gold reserves to raise money for aiding poor countries around the world. Some of the countries that have taken part in these sales include India, China, and Sri Lanka. Economic crises have also prompted the fund to undertake such sales to aid member countries such as Mexico and Brazil.