IMF History (1972-1978) Volume 3

Sale of the Fund’s Gold

International Monetary Fund
Published Date:
February 1996
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In May 1974, as various questions concerning gold were being discussed in the Committee of Twenty, a paper prepared by the Economic Counsellor and Director of the Research Department, J.J. Polak, was circulated to the Executive Board. In this paper, Mr. Polak raised the possibility that the Fund’s holdings of gold might be sold.

Paper on Gold

(May 15, 1974)

A number of ideas have been put forward in meetings of the Deputies of the Committee of Twenty on means to “mobilize” members’ gold holdings. Very little attention has been paid, on the other hand, to means to “mobilize” the gold holdings of the Fund or the implications of these various ideas for the Fund’s gold holdings. Since gold is an important source of liquidity to the Fund and since the Fund’s gold holdings, at SDR 5.4 billion, are the second largest official gold holdings in the world, these questions deserve consideration before a balanced view can be taken on any of the various approaches to the gold problem. The following tentative remarks are addressed to these aspects of the gold questions as an aid to such an appraisal.

The second and third approaches on gold contained in the Nairobi Outline (paragraph 30) envisaged abolition of the official price of gold. This idea was also embraced in the tentative ideas on gold put forward on behalf of the European Economic Community (eec) at the most recent meeting of the Deputies of the Committee of Twenty in Paris. Without a firm price, gold can hardly perform the central role assigned to it in the present Articles. Indeed, in the ideas put forward by the eec it is suggested that “monetary authorities would have … no obligation whatever to enter into any particular transaction [in gold].” If, by amendment, this particular approach to gold were generally adopted, gold would cease to have the significance to the Fund that it has under the present Articles as an assured means to acquire any needed currency by the Fund requiring a member to sell its currency to the Fund for replenishment purposes (Article VII, Section 2(ii)). This would have two important consequences for the Fund.

1. If its gold holdings were no longer usable for the Fund to acquire currencies, it would be logical for the Fund to dispose of these gold holdings under powers it does not now have, in one way or another. One possibility would be to distribute the gold to members in proportion to their quotas. Another and perhaps more interesting possibility would be for the Fund gradually over time to sell its gold holdings in the market and to invest the proceeds. Since the gold was contributed to the Fund interest free, the Fund would be able, from a financial point of view, to invest the proceeds of the sale at a zero or a low interest rate. (The Fund might want to invest the proceeds of a relatively small proportion of its gold, equivalent to its reserves, at a normal interest rate in order to cover an important part of its administrative expenditure.) It would seem natural that any investment at zero or low interest rates would be for the benefit of developing countries, e.g., in development finance institutions. It may be noted in passing that the spending of this money by these institutions would have been preceded by the sale of gold in the market; hence the two legs of the operation combined would be neutral from an inflationary point of view.

2. If this approach were taken, it would then also be necessary to create an alternative assured source of liquidity for the Fund. This could, for example, be brought about if the Fund created (once and for all) an amount of SDRs equivalent to its gold stock at the time of the reform, with full opportunity to use SDRs to acquire needed currencies.

At the May meeting of the Deputies of the Committee of Twenty in Paris, it was also pointed out by the representative of the Managing Director that the approach to gold put forward on behalf of the eec did not, in fact, ensure a gold-holding country the ability to use its gold, except by sale to the free market. It was pointed out, however, that an assured outlet could be created if the Fund stood ready to buy gold from members against SDRs at a price in the neighborhood of the free market price. To be able to do this the Fund would need to have the power to create SDRs for such purchases.

Any gold so acquired by the Fund could also be sold gradually in the market. Since the SDRs issued to members in exchange for gold would carry the SDR interest rate, the Fund would need to invest the proceeds of the sale of this gold in such a manner as to give it at least a corresponding yield.

The suggestion of gradual sales over time of gold acquired from members raises two further issues: (a) The difference in time between the acquisition of gold by the Fund and its sale in the market might lead to a price difference. It would be for consideration whether any such differences would accrue to (be borne by) the Fund or the selling member, or be shared in some manner between them. An argument that could be made in favor of the Fund assuming at least part of the risk might be its ability to absorb potential losses from profits on its own gold and perhaps also on the basis of some small margin below the market price that it could charge for gold purchases, (b) The Fund could hardly be expected to pay interest on SDRs issued for gold until it in turn had sold the gold and invested the proceeds. During the interim, the selling member would presumably bear the interest costs attached to the SDRs issued to it in exchange for gold.

If the Fund were to become a relatively large seller of gold—from its own stocks and/or gold acquired from members—particular attention would have to be paid to the possible effects that the Fund’s gold operations might have on price developments in the gold market. Careful guidelines would have to be drawn so as to ensure that sales by the Fund would help to avoid, rather than contribute to, disorderly market conditions.

“Establishment of a Facility Based on Special Drawing Rights in the International Monetary Fund and Modifications in the Rules and Practices of the Fund: A Report by the Executive Directors to the Board of Governors Proposing Amendment of the Articles of Agreement.” See Annual Report of the Executive Directors for the Fiscal Year Ended April 30, 1968 (Washington: International Monetary Fund, 1968), p. 146; also reproduced in Margaret Garritsen de Vries, The International Monetary Fund, 1966–1971: The System Under Stress, Vol. II, Documents (Washington: International Monetary Fund, 1976), pp. 67–68.

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