Why George Soros is after IMF gold

commodityonline.com

By David Lew
Gold reserves held by the International Monetary Fund (IMF) is again in the news, this time thanks to American billionaire financier George Soros. Soros has suggested that IMF should dispose of some $100 billion out of its gold reserves to spend on green loans in carbon-cutting projects to the developing countries.

Really wonderful idea, coming in from none other than Soros, Chairman of Soros Fund Management, LLC and founder of The Open Society Institute, whom the global investing world keenly watch every day to get the right investment directions. It has been reported that Soros has been buying gold as investment for the past few years.

Last month, IMF made news when it sold 200 tonnes of gold to India’s central bank, as part of its policy decision to use the money for development programmes across the developing world. Since then gold prices have gone through the roof, touching a historic high of $1227 per ounce last week.

Anyway, what is it that Soros is saying on IMF gold and carbon emission projects?

**Soros says the International Monetary Fund can use $100 billion of its gold reserves, held in the form of Special Drawing Rights (SDRs), to support green loans from rich to poor nations.

**Developed countries’ governments are laboring under the misapprehension that funding has to come from the national budgets but that is not the case. They have it already. It is lying idle in their reserves accounts and in the gold vaults of the IMF,” Soros rightly says.

**Soros’ proposal aims to tap into $283 billion of IMF money which is kept in gold reserve in case developed nations need cash injections during financial crises. These instruments are considered a “virtual currency” with a value set by a basket of real currencies.

**The IMF directors are not keen to use the gold reserve. If you’re on the IMF board of directors you like to have this nice substantial reserve to sit on so they won’t actually do this of their own free will,” Soros said, adding political will was needed to drive his initiative.

Indeed, it is a wonderful idea that Soros has put forth at the Copenhagen Climate Summit. Bullion analysts, investors, commodities commentators, IMF officials and economists world over need to discuss the suggestion from Soros for two reasons.

First, it is a fact that the IMF gold reserves-- 3,217 metric tonnes at the last count—are lying idle at the bullion vaults of the global organization. By selling a portion of IMF gold, the rich nations can help the poor nations fight poverty, hunger, and malnutrition. The IMF gold can also educate millions of illiterate children in poor nations and take care of their healthcare so that they become better citizens of the future world.

Secondly, wise investors and economists have always argued that there was no reason for IMF to keep these much gold reserves and remain silent to the happenings like poverty, displacement, illiteracy, malnutrition etc around the world, especially in developing countries. It is time global economic outfits like IMF does some charity out of the rich gold reserves it has.

Now, you would ask who is George Soros to suggest this? Most of you know, who he is. But here is a brief:

George Soros is Chairman of Soros Fund Management, LLC and founder of The Open Society Institute. He was born in Budapest in 1930. He survived the Nazi occupation and then fled communist Hungary for England, where he graduated from the London School of Economics. He then settled in the United States, where he accumulated a large fortune through the investment advisory firm he founded and managed. Soros is the author of ten books, including most recently The Crash of 2008 and What it Means.

Now that George Soros has suggested a wonderful idea, you may like to know what is the current gold reserve position at IMF and how often in the past has IMF sold gold for social causes.

I have culled out the following information on gold reserves from IMF documents:

The IMF holds 103.4 million ounces (3,217 metric tons) of gold at designated depositories. The IMF's total gold holdings are valued on its balance sheet at SDR 5.9 billion (about $9.2 billion) on the basis of historical cost. As of August 28, 2009, the IMF's holdings amounted to $98.8 billion at current market prices.

A portion of these holdings was acquired after the Second Amendment of the IMF's Articles of Agreement in April 1978. This portion, amounting to 12.97 million ounces (403.3 metric tons) with a market value of $12.4 billion as of August 28, 2009, is not subject to restitution to IMF member countries (see below), unlike gold the IMF acquired before 1978.

The IMF acquired the majority of its gold holdings prior to the Second Amendment through four main types of transactions.

• First, when the IMF was founded in 1944 it was decided that 25 percent of initial quota subscriptions and subsequent quota increases were to be paid in gold. This represents the largest source of the IMF's gold.

• Second, all payments of charges (interest on member countries' use of IMF credit) were normally made in gold.

• Third, a member wishing to acquire the currency of another member could do so by selling gold to the IMF. The major use of this provision was sales of gold to the IMF by South Africa in 1970–71.

• And finally, member countries could use gold to repay the IMF for credit previously extended.

How and when the IMF has used gold in the past

Outflows of gold from the IMF's holdings occurred under the original Articles of Agreement through sales of gold for currency, and via payments of remuneration and interest. As noted, since the Second Amendment of the Articles of Agreement, outflows of gold can only occur through outright sales. Key gold transactions included:

• Sales for replenishment (1957–70). The IMF sold gold on several occasions to replenish its holdings of currencies.

• South African gold (1970–71). The IMF sold gold to member countries in amounts roughly corresponding to those purchased from South Africa during this period.

• Investment in U.S. government securities (1956–72). In order to generate income to offset operational deficits, some IMF gold was sold to the United States and the proceeds invested in U.S. government securities. Subsequently, a significant buildup of IMF reserves prompted the IMF to reacquire this gold from the U.S. government.

• Auctions and "restitution" sales (1976–80). The IMF sold approximately one-third (50 million ounces) of its then-existing gold holdings following an agreement by its member countries to reduce the role of gold in the international monetary system. Half of this amount was sold in restitution to member countries at the then-official price of SDR 35 per ounce; the other half was auctioned to the market to finance the Trust Fund, which supported concessional lending by the IMF to low-income countries.

• Off-market transactions in gold (1999–2000). In December 1999, the Executive Board authorized off-market transactions in gold of up to 14 million ounces to help finance the IMF's participation in the Heavily Indebted Poor Countries (HIPC) Initiative. Between December 1999 and April 2000, separate but closely linked transactions involving a total of 12.9 million ounces of gold were carried out between the IMF and two members (Brazil and Mexico) that had financial obligations falling due to the IMF.

In the first step, the IMF sold gold to the member at the prevailing market price and the profits were placed in a special account invested for the benefit of the HIPC Initiative.

In the second step, the IMF immediately accepted back, at the same market price, the same amount of gold from the member in settlement of that member's financial obligations. In the end, these transactions left the balance of the IMF's holdings of physical gold unchanged.

Interesting statistics on gold reserves from IMF. Now, let us wait and watch whether IMF and global political leaders would take the cue from George Soros and use gold reserves to the betterment of the developing world.