Translated material
Sell family gold
IMF seeks livelihood
The International Monetary Fund, whose main goal is to prevent financial crises and overcome their consequences, has itself found itself in a difficult position. This is due to the peculiarities of the IMF financial organization. The fund provides anti-crisis financing through credit lines opened for it by the central banks of the shareholder countries. But the expenses for the current activities of the IMF itself (about $1 billion annually) are financed from the interest paid by borrowing countries. Accordingly, the stability of the world economy is inversely proportional to the stability of the IMF: when there are no crises, the fund’s credit resources are not in demand, which means that interest payments are not received. Meanwhile, the fund's normal analytical activities continue.The fund is one of the largest holders of gold in the world. Its gold reserves, amounting to 3,200 tons, were formed through contributions from members of the organization and have never been revalued. A year ago, the IMF management proposed selling part of its gold reserves, investing the proceeds, and using the income from these investments to finance current activities. But then the idea was not supported by the United States, the fund's largest shareholder.
The head of the IMF, Rodrigo de Rato, acted politically wisely: in order not to upset shareholders himself with requests for additional financing, he convened a group of “wise men” to develop a new model for generating fund income. The group is led by JP Morgan Chase International President Andrew Crockett, a former head of the Bank for International Settlements in Basel. Under his leadership are former Federal Reserve Chairman Alan Greenspan, European Central Bank chief Jean-Claude Trichet, Bank of China head Zhou Xiaochuan, Harvard Management Company chief Mohamed El-Erian (in 2004 he was nominated for the post of head of the IMF), as well as heads of major banks. Mexico, Saudi Arabia and South Africa.
On Wednesday, the results of the thoughts of the “sages” became known - Andrew Crockett and Rodrigo de Rato told reporters about them in Washington. The “wise men” recognized the current model of a financial organization as outdated and named three new financial sources. The first option is to form a kind of investment fund, the income of which could be used for current expenses. In fact, this is the “monetization” of IMF shareholder quotas, since the funds for investment should be contributions from countries, amounting to a certain percentage of their share in the fund’s capital. The second is to introduce fees not only for credit resources, but also for the services provided by the IMF, that is, for technical assistance. And finally, the third is to sell gold. As before, it is proposed to invest the proceeds from this operation. Mr. Crockett said that we could be talking about the sale of 400 tons, the estimated value of which today is $6.6 billion (in the calculations, the “wise men” proceeded from a very conservative estimate of $500 per ounce).
Each of the proposed options is, as they say, lame. The negative attitude of shareholders towards the former is understandable. The second option threatens that countries receiving technical assistance will simply refuse it. The third option still faces resistance from the United States. And this is fundamental: to make a decision, 85% of the vote is required, while the Americans have a “controlling” stake of 17%. Representatives of the White House explain their position by saying that they need to contact Congress to approve such a deal, and this is a troublesome and futile task. However, according to some reports, this explanation is refuted in the report of the “wise men”. Mr. Crockett did not talk about this at a meeting with journalists, and the report itself has not yet been published.
Despite Washington's resistance, the path of selling gold seems the most realistic. Analysts are already predicting how this operation will affect the market. The IMF press release states that such sales should be strictly limited and accompanied by measures to minimize the impact on markets.
Throughout last year, gold rose in price: in 2006, compared to 2005, the average annual price rose by 36% - to $604 per troy ounce; and from the beginning of the year before last - from 520 to 635 dollars per ounce. The annual maximum was recorded at $730 per ounce.
The growth trend continues, and experts do not yet see any reason for it to change. Since the main factors that moved gold upward last year are also relevant this year: the weakening of the American currency continues, oil prices are unstable, the situation in the international political arena is not entirely predictable and has become even more aggravated with the change in the composition of the US Senate. All this fuels investor demand for gold as a more stable investment instrument. “Experts recommend that the IMF sell gold because they believe that its price is close to the maximum and want to fix its value,” says Dmitry Parfenov, head of the analytical department of the Prospekt Investment Group.
At the same time, according to various experts, there is an excess supply of gold on the market. In 2006 it amounted to 638 tons compared to 438 tons in 2005. This is also due to rising prices, because because of this, demand from consumers of “physical gold” - jewelers, dentists, and industry - is decreasing. The total volume of the gold market in 2005, according to the International Gold Council, amounted to 3,734 thousand tons. For three quarters of 2006 (data for the year as a whole have not yet been published), it reached 2,455 thousand tons. However, quarterly consumption was lower than in 2005. However, this situation has little effect on investment demand for gold. Speculators continue to exploit it as the main alternative to cash investments.
Mr. Parfenov believes that if another 400 tons of gold appear on the market, he will quickly “digest” this volume. Like other excess metal, this gold will likely end up in investment trusts and hedge funds. The appearance of such a volume of metal on the market can certainly reduce the price of gold, but this adjustment will be short-term and insignificant.
Discussions at the IMF are just beginning. An interim report should be prepared by April, when the International Monetary and Financial Committee (the IMF's governing body of 24 managing directors from shareholder countries) meets in Washington.