The IMF and their Gold

The IMF is talking about selling some of their gold again. It seems they've been having some problems squaring the books lately and think that they'd be better off trading in some of their gold stock for stocks in companies or some other investment - something that earns a "return".

In yesterday's Wall Street Journal it was reported($) that a blue-ribbon panel recommended the move after it became clear that interest payments the organization receives on loans to developing countries were declining rapidly. The panels members included none other than former Federal Reserve Chairman Alan Greenspan and Zhou Xiaochuan, governor of the People's Bank of China.

The IMF normally finances itself by charging interest on bailout loans. But with the global economy expanding at a fast clip, many borrowing nations are paying off their IMF loans early in order to clean up their balance sheets. Ecuadorian Finance Minister Ricardo Patino told reporters yesterday that his country would pay off its remaining IMF debts and tolerate no further IMF "demands on economic policy."

The drop-off in lending means the IMF will face a $400 million hole in its $1 billion annual administrative budget by 2010 unless it cuts spending or raises new revenue. The IMF also has $9 billion in reserves, and 3,217 metric tons of gold stores. The panel urged the IMF to sell off 400 metric tons of gold, invest the proceeds and spend the interest earnings, estimated at $195 million a year.

Let's do the math on this.

One metric ton equals 2,205 pounds x 16 14.583 ounces/pound or 35,280 32, 155 ounces. So, for various spot prices for gold, the following value per ton can be calculated:

• Dec 29, 2005: $513 per ounce - $18.1 $16.5 million per ton
• Dec 28, 2006: $632 per ounce - $22.3 $20.3 million per ton
• Feb 01, 2007: $656 per ounce - $23.1 $21.1 million per ton

Selling 400 tons yesterday would have netted $9.2 $8.4 billion, however, the figure quoted in the report cited a value of $6.6 billion which works out to a gold price of about $470. Also, earning $195 million per year on the proceeds of $6.6 billion is a return of only 2.9 percent.

Does anyone at the IMF have a calculator or read the newspaper?

Interestingly, for all their cash flow problems, the IMF is doing quite well with their current asset allocation - they might want to reconsider the panel's recommendation.

They have $9 billion in cash reserves to go along with a total of 3,217 metric tons of gold stores. At yesterday's price, that puts the value of the gold currently "on the books" at the IMF (i.e., recorded as assets independent of whether the physical metal has been leased out) at about $74 $68 billion.

In fact, if all the metal is still in their vault, for the year 2006 they made a cool $13.5 $12.4 billion on that dusty pile of gold bars.

Maybe they should reconsider the plan to unload 400 metric tons. If 2007 is anything like the last five years, gold will rise in value by 15 or 20 percent, so that 400 tons of gold stock they're getting ready to unload would rise in value between $1 and $2 billion in 2007 alone -more than enough to offset the reported $400 million to $1 billion budget problem.

Here's a better idea - just sell enough gold to make ends meet for 2007, then revisit the situation next year. Twenty or thirty tons ought to do it - this is a much more prudent way to square the books.

You'll be glad you did.

China's $1 Trillion in Paper Reserves

Of course China may not like that idea too much - they might be eyeing that upcoming sale thinking that they could increase the percent of gold their central bank holds as reserves - they've got way too much in paper assets at the moment.

In the table below, you can see what would happen if China bought all of the IMF's proposed gold sale of 400 tons - not much. As a percent of total reserves, that would be an increase from 1.2 percent to 2 percent - just a drop in the bucket.

They're probably thinking about a number closer to five or ten percent anyway - ten percent would be another 4,000 tons. Where's that going to come from?
And then there's the Russian central bank that has been talking about moving to a five or ten percent allocation of gold held as reserves. That would be a thousand tons more, not to mention the oil exporters in the Middle East who are having similar thoughts.

Since the European banks have balked at selling gold lately, unloading only 350 tons of the 500 tons allocated under the Washington Agreement last year, this could present a real supply/demand problem.

Hmmm...