The International Monetary Fund should sell some gold to cover losses, said an advisory panel that includes former Federal Reserve Chairman Alan Greenspan and European Central Bank President Jean-Claude Trichet.
The Washington-based IMF could sell 400 metric tons of gold, valued at about $6.6 billion, and invest the proceeds in interest-bearing assets, the panel said in a report released yesterday. Sales should be handled in a way that avoids „disturbances” in the gold market, a press release said. Gold sales are part of a package of measures intended to reduce the IMF's dependence on the interest it earns from loans to member nations. The fund projects a loss of about $103 million this fiscal year after countries including Brazil and Argentina repaid loans early. „If adopted, the measures would set the fund's finances on a sustainable basis, and ensure a solid foundation for the fund's important role in the international community,” panel chairman Andrew Crockett, president of JPMorgan Chase International, said in a statement. The IMF could earn about $195 million a year by selling a portion of its total holdings of 3,217 metric tons and investing the proceeds, the report says. The proposed amount of gold sales would be twice the 6.3 million ounces traded on an average day on the Comex Division of the New York Mercantile Exchange.
The amount is „huge, but it's going to be sold piecemeal over years,” said Michael Guido, director of hedge-fund marketing at Societe Generale SA in New York. „It's not going to have an immediate impact on prices.” Gold futures for April delivery rose $6.80, or 1.1%, to $657 an ounce at 1:06 p.m. in New York. Prices earlier reached $660.70 an ounce. Before today, gold was up 14% in the past year. The panel used an average of gold prices for the past two years to value the IMF's holdings. At today's price, the value of the 400 metric tons proposed for sale would be about $8.5 billion. Gold sales would require the approval of member countries including the US, which has a veto over IMF decisions. The Treasury Department will „consider options for addressing the IMF medium-term finance issues in due course,” spokeswoman Brookly McLaughlin said. IMF Managing Director Rodrigo de Rato, who appointed the eight-member advisory group, has already started discussing the recommendations with the fund's executive board, according to the press release. Formal proposals will be submitted in coming months, it said.
Without changes, the IMF would lose another $185 million in the year ending April 30, 2008, and $244 million the following fiscal year, according to panel's the report. The IMF has sold gold before. The most recent sales took place between 1976 and 1980, when the fund unloaded 50 million ounces following an international agreement to reduce the role of the metal in the global monetary system. The panel also recommended investing some of the money contributed by member nations, known as „quotas,” broadening existing investments, and charging members for advisory services. The fund could generate as much as $300 million a year by investing $30 billion, or almost 10% of the available quotas, the panel estimated. Founded at the end of World War II to promote global economic stability, the IMF keeps a watch on the currency, trade and economic policies of its 185 members and makes nonbinding recommendations for improvement. The fund provides low-cost loans to countries in financial need on the condition that borrowers undertake economic policy changes such as adjusting their balance of payments or reducing inflation.
The IMF's current system of financing operations with earnings on its loans creates „misaligned incentives,” John Lipsky, the fund's second-ranking official, said in an interview last month. „If our members were in trouble and in need of financing facilities, we did well,” Lipsky said. „But our interest and our income should be aligned with our members'.” The other members of the advisory committee are Mohamed El-Erian, CEO of Harvard Management Co., South African Reserve Bank Governor Tito Mboweni, Bank of Mexico Governor Guillermo Ortiz, Hamad Al-Sayari, governor of the Saudi Arabian Monetary Agency, and Zhou Xiaochuan, governor of the People's Bank of China. (Bloomberg)