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.
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,
Peter.
