Commodities | Feb 26 2008
By Greg Peel
The International Monetary Fund was established as part of the Bretton Woods agreement at the end of World War II. It was built on contributions from member countries who then had the right to withdraw if needs be, with majority approval, and was created as an overseeing body for world trade and exchange rates. It also became a fund for the assistance of developing countries. At one point the IMF was flat out supporting developing countries, such as those in South America for example, and it built up a substantial infrastructure.
The IMF is mostly a plaything of the US government, given the position held by the US as everyone’s saviour from Hitler and Tojo and the changing of the world economic guard apparent at the end of the war. It is held in disdain by America’s enemies, and to a great degree by developing Asia which sees it as a meddling anachronism. As the clout of the US wanes, so too does the significance of the IMF.
But the IMF’s biggest problem has been the booming economic development of once developing countries, from Brazil and beyond. Whereas once the organisation ran on the income from sovereign loans that seemed would never be paid off, now they have been paid off. The IMF is now like a bank with customers that have more cash than it does. But the infrastructure has remained largely intact, meaning the Fund has been bleeding money.
It also happens to be the world’s third largest holder of gold (103.4moz), behind the US and Germany. That gold was pledged by member countries as a currency backstop and thus the IMF requires approval to sell it. The IMF tried to seek approval in 1999, and again in 2005 to sell some gold to cover its losses, but was knocked back both times. US Congress has demanded the IMF puts its house in order before it sells off the family jewels.
So it is the IMF has pledged to cut 15% of the 2600 staff and slash US$100m off the budget to offset dwindling revenue. The IMF has threatened to seek approval to sell gold for a long time, each time briefly spooking the gold market until it became a bit of a “cry wolf” concept. This time, however, it appears the request to let 12.9moz go into the buoyant gold market might be granted on Capitol Hill. A sale requires 85% approval of the 185 member countries and the US holds the cards. (Countries as been included into the IMF ever since its establishment, the most recent being Montenegro last year).
The response to this news was indeed a fall in the price of gold last night, but given recent volatility and a slightly firmer US dollar last night, you’d never know it was specific response. Once upon a time the fall might have been much more significant. The amount represents 403t of gold, but would be eased out, not dumped. When you consider Switzerland, for one, has indicated it would sell 250t in the next couple of years, and gold has jumped a couple of hundred dollars since Switzerland disclosed its intentions, then it doesn’t look like IMF sales would really make a big difference.