Last week Eric Sprott, who heads up the Sprott Physical Gold Trust (NYSE:PHYS), created a bit of a storm when he offered to buy the IMF’s remaining 191.3 tons of gold for sale on the market. The IMF told him to piss off.
So the world started wondering if the IMF actually has the 3,005.3 metric tons of gold it claims. Or, if the US and other countries have the gold they claim to have.
The issue really comes down to ownership. We all know the old adage, “Possession is 90% of the law.” One wonders if that applies to the IMF.
The IMF originally got most of its gold from payments of quotas, whereby member countries paid in 25% of their funding quotas to the IMF in physical bullion. This method was maintained until 1978 when it was already abundantly clear that gold production couldn’t keep up with government printing presses and the gold standard was abolished.
Since 1978, the IMF hasn’t dealt much in gold, but did manage to acquire 403.3 tons of gold since then, mainly from South Africa in 1999. That’s the gold for sale (less the 212 sold to India, Sri Lanka and Mauritius central banks).
The rest of the gold paid in by member countries is stored in depositories in the US, the UK, France, and India (which made the 200 ton sale to India rather simple, not to mention coincidental).
This gold belongs to the IMF of course. But if 85% of IMF vote holders decide to send the gold back to whence it came, the gold goes back to the countries that donated it. The US, with 17% of the vote, obviously has veto power over this.
Of all the gold paid into the IMF, 50% had to be stored in “the depository designated by the member in whose territories the Fund has its principal office.” That’s another way of saying “Uncle Sam’s vault” (the IMF is headquartered in Washington D.C. across the road from the World Bank and less than a km from the Federal Reserve).
This is all pretty boring stuff, until you read the adjustment to the articles adopted on 1 April 1978 (not an April Fool’s Day joke, but it may as well be):
F-2. The Fund may hold gold under earmark for members.
IMF Articles 1978
This is such a tiny innocuous little phrase and really shouldn’t make a diff right?
But the problem comes down to its other articles of incorporation, which state that the IMF can’t loan its gold. However, if instead of calling the gold its own, it holds gold “under earmark for members” then the members can simply loan out the gold… as well as call the gold their own.
Sure, I’m not a lawyer and may be misinterpreting this deliberately ambiguous phrase, but it’s what is actually going down.
The US gold reserves, for example, include the gold it has paid into the IMF and which the IMF holds “under earmark for members”.
This came out last year when in an interview with Conny Lotze of the IMF who stated that, “Members do not include IMF gold within their reserves because it is an asset of the IMF. Members include their reserve position in the fund in their international reserves.” That’s world-class gobbledegook.
To put it in English, IMF gold isn’t counted as reserves, but the gold that the IMF holds under earmark for members is their reserve position in the fund and therefore gets counted in their international reserves.
That’s all pretty handy really. So the IMF owns the gold and doesn’t lend it, but because it’s held under earmark for members, the members themselves can lend it (and include it in their own stated gold reserves).
It also brings into question the accounting standards used.
If the countries that provided the gold are still counting that gold amongst their reserves — or can selectively decide to do so — one wonders how much of the IMF gold is double counted as central bank gold. It seems pretty clear that if you added up all the gold in the world’s central banks plus the IMF gold, you’d be coming up about 3,005.3 tons short of what’s actually in the depositories. Or at least physical bullion plus JP Morgan IOUs!
Once again, this is mere speculation with little factual basis. But there is an interesting jump in the amount of official gold holdings between 1958 and 1959. This was the first major increase in IMF gold since 1945, and boosted institutional gold holdings (IMF) by 797 tons. At the same time, central bank holdings — the supposed source of this gold — fell by just 48 tons. Hah! And you through Enron was breaking ground with accounting fraud!
This one time jump in total official gold holdings of 749 tons was the second largest on record — beaten only by the 1963 jump of 833 tons ahead of the 1966 increase in IMF gold. Since 1966 there has only been one year where official global gold reserves rose by more than 150 tons. And if you haven’t guessed that it was the next time the IMF increased its gold holdings, then you really aren’t getting my drift. That was 1970 when world official gold holdings rose by 320 tons. I’m willing to bet the IMF’s entire gold reserves (less 191.3 tons) that they are double counted.
One final thought… between 1950 and the peak of the 1980 gold bubble, world official gold holdings rose by 4,740.1 tons, according to the World Gold Council. The same source notes that gold held at institutions (IMF, BIS, EMI) which was transferred from central banks also increased by 4,740.1 tons. Gold held at central banks was unchanged after 30 years at 29,721.0 tons.
This is entirely coincidental by the way and you shouldn’t read anything into it at all.
Cheers,
P
