IMF to Sell Gold, Fix Finances

The International Monetary Fund announced yesterday that it would sell 12.97 million ounces of its gold reserves to raise US$11 billion. IMF chief Dominique Strauss-Khan stated, “It is a fundamental step that will enable the institution to remain an independent, astute, and dynamic international organization.” The IMF is overhauling its income model, and at current prices, selling off about 12% of its total gold holdings makes a lot of sense.

Of the $11 billion, the IMF intends to keep $4.4 billion on its books and spend $6.6 billion on US government and corporate bonds. These are superior to gold in the sense that they generate an income in the form of interest. Gold doesn’t provide that; it appreciates or depreciates, but there isn’t a quarterly check mailed out. The IMF needs this income to fill a $400 million shortfall. The organization is also cutting $100 million from its budget over the next three years.

The deal isn’t done yet, though. The US Congress has to agree to the sale, and the other 184 members of the IMF have their own approval processes to complete. So, it is no surprise that the announcement that 400 tons of gold was coming to market did little to the price of the metal. Approval may take a while, especially in an election year in the US, and in 2005, Congress refused to let the IMF sell gold.

Rumor also has it that the IMF is joining the Central Bank Gold Agreement that was inaugurated in 1999. This caps the amount of gold that central bank’s can sell at 500 tons a year. The idea was to ensure that the supply of gold was, if not stable, relatively predictable to avoid spooking the market. If the IMF joins, it will ensure that the sale of the IMF’s gold is done in stages over the course of several years.

This change to income generating investments marks a shift in the IMF’s strategy. Until now, it has largely managed to fund itself by lending money to countries that repay their loans – good old-fashioned banking. Because demand for IMF loans is dropping (the capital markets can provide most of what countries need), a new approach is needed. Or is this a case of an international organization looking for a purpose, having outlived its initial function?

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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