Gold and the International Monetary Fund

The International Monetary Fund (IMF) is the second-largest holder of gold in the world.

From 1944 to 1978, gold was the unit of account and the central reserve asset of the international financial system. Gold was an asset generally used by the IMF in the conduct of its ordinary operations. In other words, gold was a usable asset underpinning the liquidity of the Fund.

In 1976, an amendment was made to the IMF which abolished the use of gold as a common denominator for determining par values of currencies and ended the use of gold for effecting day-to-day transactions with the Fund. As a result, gold essentially became another financial asset.

Today, however, gold held by the Fund is regarded as central to its credibility as the central institution in the international monetary system. Holding gold allows the Fund to be fully equipped to respond to a crises. The important strength that gold gives to the Fund derives from the fact that it is the only fundamentally undervalued asset in the Fund’s current balance sheets. It can be sold to IMF members at the former official price of 35 Special Drawing Rights or to the market at a market-related price with strict limitations on how the IMF can use the profits.

Two examples illustrate that gold is a usable asset when circumstances warrant. In the first example, the Fund made significant gold sales between 1976 and 1980 and placed the profits into a trust fund benefiting low-income countries, thereby achieving a major recycling of gold profits. The loans made by the trust fund have been repaid and the proceeds have been reused. Assuming good management of these funds, it is possible to conceive that, in due course, the Fund will be able to create a permanent account to benefit low-income countries.

In the second example, in 1990, the Fund pledged the use of up to 3 million oz. of its gold assets, if needed, as additional security for borrowings it had undertaken under the Enhanced Structural Adjustment Facility. The Fund does not undertake transactions in gold, but its gold holdings could be mobilized for good reason, provided its membership agrees. The Fund can sell gold only with an 85% majority of the Fund’s total voting powers. In other words, the use of the Fund’s gold would have to be a consensus decision by the membership.

— This article is a summary of a presentation given at the Central Bank Workshop on Jan. 20 in New York and sponsored by the World Gold Council. David Williams is treasurer of the IMF.