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Whose Gold Exactly?

The IMF thinks it owns the 400 tonnes of gold that it wants to sell...

YET AGAIN there has been much talk of late about the International Monetary Fund (IMF) selling a chunk of its gold.

   And the more we look at the subject today – contrary to our previous view – the more likely it seems possible.

   But it's not yet probable. And if it does happen, however, it will not then happen again for several solid reasons.

   Should the sales actually take place, they will only happen from Sept. 2008 onwards. And the idea will still have to get past the US Congress – a most formidable and possibly insurmountable obstacle.

IMF Gold: Who Owns It?

   The first question that will be asked is just whose gold do the IMF want to sell?

   After all, the gold held by the IMF belongs to each individual nation that contributed it, so how dare the administrative side of the IMF propose selling its members' gold – and how dare some members of the IMF approve of the sale without getting the okay from all other members first?

   The answer is quite simple. The IMF does not believe that the gold they propose selling belongs to any member at all, but in fact – the think – it belongs to the IMF itself.

   Consequently, the only discussion surrounds the disposal of the IMF's own assets!

   How could the IMF get its own gold to sell?

IMF Gold: Heavily Indebted Poor Countries (HIPC)

   Between December 1999 and April 2000, separate but closely linked transactions involving a total of 400 tonnes of gold (some 12.9 million ounces) were carried out between the IMF and two members, Brazil and Mexico.

   They both had financial obligations falling due to the IMF, but the resolution – through gold – was not via an open-market sale. Instead, the IMF conducted an "internal sale".

  1. The IMF sold gold to the members at the prevailing Gold Market price;
  2. The profits were placed in a special account;
  3. Then the profits were invested for the benefit of the so-called "heavily indebted poor countries" initiative (HIPC).

    But take note! In the second step, the IMF immediately accepted back, at the same market price, the full amount of gold from the members – in this case Mexico and Brazil – in settlement of that member's financial obligations to the fund.

   The net effect of these transactions, therefore, was to leave the balance of the IMF's physical Gold Bullion holdings unchanged. However, ownership of that gold moved from Brazil and Mexico to the International Monetary Fund.

   To emphasize the point – and to give it relevance to the present proposals – this 400 tonnes of gold no longer belongs to Brazil or Mexico. It now belongs to the IMF itself. And such a process could help change the attitude of those IMF members yet to follow the lead of the largest members, the Group of Seven rich nations.

IMF Gold: The G7 Agreement

   The United States, Japan, Germany, Britain, France, Italy and Canada – known as the G7 – approved the idea of IMF gold sales when they met recently in Tokyo. This increases the chances of a sale this time, while not affecting any other member's gold.

   To give you a little more background on the IMF so as to make sense of this proposal, a brief look at the IMF and its business will help.

  • Founded at the end of World War II with donations of cash and gold from its member nations, the IMF works at "crisis prevention", monitoring and hoping to avoid policy mistakes that could lead to big financial problems.
  • The IMF also lends to countries facing balance of payments problems from its 'cash' of $338 billion. By charging interest on short-term loans, the IMF earns its keep.
  • The IMF also makes loans to low-income countries implementing poverty reduction programs, currently helping 23 countries from Afghanistan to Sierra Leone.
  • The IMF acquired all its holdings (gold and cash) from member states through the original Articles of Agreement. These Articles were amended in 1978, eliminating the direct use of gold in the exchange rate system.

   Since the Argentine crisis of 2001, however [blamed on the IMF's advised policies] new IMF lending, has shrunk dramatically as the world's emerging economies have developed remarkably.

   In essence, the IMF in the light of the changed global scene, should be downsizing considerably in line with its reduced business – a principle that should govern all monetary institutions. This would enable it to match its costs to its reduced income. The fund is spending $1 billion a year but only bringing in $600 million!

   So as it is, the IMF is not an interest earning institution, there to maintain redundant economists. The thought of increasing income to an institution that can no longer justify its size should send alarm signals to its members.

   This was emphasized by a report submitted to the IMF Executive Board, the Committee, headed by Bank of International Settlement (BIS) head Sir Andrew Crockett, who concluded that the IMF's current income model, which relies heavily on the interest it earns from loans to member nations, is "no longer appropriate".

   But there it is; they feel they should bail out the IMF from its present mess. And the reason the G7 gave for approving these sales is that "this is arguably a good time to consider selling some of these gold holdings and investing the proceeds in financial securities with positive yields."

   It is amazing that such a statement is made by such qualified men, but they do have to promote paper instruments. That is their business.

   Of course, with Gold Prices having quadrupled in the last four or five years, no solid financial securities with positive yields have come anywhere near to matching this performance, nor is any likely to. Indeed the global credit crunch has confirmed just how risky alternative investments to gold can be.

IMF Gold: Poor Reasons for Selling

   The International Monetary Fund now holds 3,216.17 tonnes (103.4 million ounces) of gold worth some $92 billion at current market prices. But we are talking here about only the 400 tonnes of gold deemed to belong to the IMF as an institution.

   Thin ground, yes, but that's why it is only this 400 tonnes.

   For the full story, visit the here...

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

See full archive of Julian Phillips.

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