By Jon A. Nones
SEATTLE (ResourceInvestor.com) The Executive Board of the International Monetary Fund has endorsed a new package of measures to shore up finances, which includes the previously announced sale of more than 14.2 million ounces of gold, currently valued at over $13 billion. The Group of Seven has endorsed it the U.S. Administration has endorsed it the U.S. Congress has yet to endorse it.
Managing Director Dominique Strauss Kahn said in a statement that the IMF had made difficult but necessary choices to set the IMF's finances on a sound long term footing and end the institution's over reliance on income from lending operations to finance its work.
The IMF's new income model would be based largely on generating funds from various sources rather than relying on lending, and includes $100 million of spending cuts over the next three years. The restructuring also includes broadening the IMF's investment authority to help it boost returns.
The fund has an annual deficit of about $400 million, spending $1 billion a year but only bringing in $600 million, while holding 3,217 tonnes (103.4 million ounces) of gold worth $95 billion at current prices up from $23 billion just 5 years ago. The IMF is the world s third largest holder of bullion behind the U.S. with 8,133.5 tonnes and Germany with 3,417.4 tonnes.
The new model could generate an additional $300 million in income within a few years, the IMF said.
Tuesday s announcement follows a recommendation in late January by an esteemed group of eminent persons, including former Fed Chairman Alan Greenspan and current President of the European Central Bank Claude Trichet, advocating on the market sales of 400 tonnes of gold by the IMF as means to finance ongoing costs.
In a report submitted to the IMF Executive Board today, the Committee, headed by Bank of International Settlement head Sir Andrew Crockett, 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.
At that time, the fund estimated gains about $6.6 billion in revenue with the sale of 400 tonnes at $500/oz. Investment of the proceeds would yield approximately $195 million per year, assuming a real rate of return of 3%, according to the committee. At $900/oz gold, revenue would increase to about $11.5 billion.
Any sales of the IMF's gold, however, must be approved by 85% of the organization's total voting power. Therefore, U.S. Congress must approve the IMF's proposal to sell gold, and the 185 member countries must approve the amendment, with most member countries required to enact legislation to expand the IMF's investment authority.
The United States, as the largest single member nation, and the largest single contributed of the IMF's gold, holds a crucial 17% of that 85% voting power and can effective veto the proposal. The U.S. previously blocked an attempt to sell IMF gold to the market formally in 1999 (see Joint Economic Committee Study) and informally 2005.
Mark O Byrne, director at Gold Investments, said in a market note that approval by the U.S. Congress remains a significant stumbling block largely ignored in some of the coverage of the story.
These rumours have been doing the rounds for many months and have failed to affect the market, and besides possible short term sell offs, they will continue to have little impact on the gold market, he added.
Even still, the G7 approved the sale of gold by the IMF in mid February as part of its broad income reform. Then a few weeks later, the U.S. Treasury reportedly backed the proposal. Now rumours are circulating that the U.S. Congress may indeed clear the move.
Matthew Turner, metals analyst at VM Group, told RI that today s announcement is another step forward, and now the only real opposition can come from the U.S. Congress, and I suppose by agreeing, it s got a kind of inevitability about it.
The IMF committee made clear that it wanted the gold sales sold in a manner with strong safeguards to avoid disrupting the market, much like gold sold consistent with the European Central Bank Gold Agreement, which limits sales to 500 tonnes per year.
IMF Finance Department Director Michael Kuhn recently told IMF Survey Online that the IMF would either sell the gold to a central bank that is willing to buy gold, or sell in conjunction with the already established official gold sales program the Central Bank Gold Agreement.
We will coordinate with other official holders of gold to sell in such a way that we do not increase the overall amount of official gold sales into the market. Naturally, the sales will be conducted within a strong framework for governance and controls, and with a high level of transparency. We are the world's third largest holder of gold, and we are keenly aware of our responsibility not to disrupt the gold market, he said.
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