G20 supports IMF's plan to sell 403 tons of gold

Endorsement signals plan likely to be approved by member countries this year

NEW YORK (MarketWatch) - Leaders from the Group of 20 nations Thursday endorsed the International Monetary Fund's plan to sell 403 tons of gold to raise funds to support the world's poorest countries.

The announcement from G20 leaders helped add pressures to Thursday's gold trading. Gold futures fell $20.30, or 2.2%, to $905.80 an ounce in recent trading on the Comex division of the New York Mercantile Exchange. See Metals Stocks.

The G20 vowed in its statement to "use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries." Read more on G20.

The endorsement suggests that the IMF's gold sales plan is likely to be approved by its member countries later this year.

The IMF has been planning to sell gold since as early as 2007 to diversify its revenues and strengthen its balance sheet. But the plan needs to be approved by an 85% majority vote from its 185 members.

The U.S., which has 17% voting power in the fund, essentially holds veto power. The U.S. government has informed the IMF that Congressional authorization by law is required before it is able to support the plan.

The U.S. Treasury announced last year that it will seek authority from Congress.

Hussein Allidina, an analyst at Morgan Stanley, said in a note Thursday that he expects the IMF to implement the sales over the next few years, "but do not believe that this presents a strong negative risk to gold prices - as it will be 'orderly' and maybe even off market."

The US administration has seemed supportive, both for expanding the IMF's role as well as helping its long-term funding challenges. This makes the proposed IMF gold sales much more likely, as the US Congress effectively has a veto on this decision, with the US having a 17% vote on an IMF decision that needs 85% to pass.

Minimize market impact

The IMF, which holds more than 3,200 tons of gold, is the third-largest holder in the world after the U.S. and Germany.

Most of the IMF's gold holdings come from the fund's member countries, which are required to commit 25% of their quota in gold. The fund can't sell those holdings into the markets.

But an additional 403.3 tons of gold the fund acquired through off-market transactions in 1999 and 2000 - such as interest payment from countries that received IMF loans - are not subject to the restriction.

If member countries approved the gold sales, the IMF can find ready buyers in countries with low gold reserves, especially Russia and some Asian countries such as China, Taiwan, and India.

China, with less than 1% of its $2 trillion reserves held in gold, has expressed interest in buying more gold, crude oil, and other strategic commodities.

According to the IMF's plan, the gold selling will be implemented in coordination with major central banks to minimize the impact on the market.

The European Central Bank said Wednesday it had completed the sale of 35.5 tons of gold.

The gold sales were in full conformity with the second Central Banks Gold Agreement, which was signed in 2004 by the ECB and other European major official gold holders.

The second CBGA, which caps total gold sales of the signatories at 500 tons a year, expires in September. Some analysts expect a third CBGA to be signed before September.

Moming Zhou is a MarketWatch reporter based in New York.

No plans to change position on gold sales - IMF

n response to speculation that the IMF might cancel its proposed gold sales programme, it has denied that any such change of plans is under consideration.

Author: Jan Harvey
Posted:  Thursday , 12 Feb 2009

LONDON (Reuters) - 

The International Monetary Fund said it does not intend to alter plans to sell just over 400 tonnes of gold to fund changes to its financing base, an IMF spokeswoman said on Wednesday.

A recent surge in IMF lending to countries facing balance of payments crises related to the global economic slowdown and financial turmoil has led analysts to question whether the Washington-based institution will proceed with the plan.

But a spokeswoman for the IMF -- the third largest official holder of gold -- said the sale would still go ahead.

"There are no plans to change the proposal for a new income model," she said.

"The package of IMF governance reforms, including gold sales, was submitted to the U.S. Congress last November, but will need to be reintroduced as a formality," the IMF spokeswoman said. "The timeline will depend on the Congress' schedule."

The IMF agreed in May last year to create an endowment with the profits from the proposed sale of the gold as part of a broader makeover of the IMF's financial structure and investment strategy.

Such a move, however, depends on approval by member countries' legislatures, including the U.S. Congress. With a change of administration in Washington and a focus in the United States on the economic turmoil, the issue of gold sales and more general IMF reform has been pushed to the back burner.

The sale of 403.3 tonnes of gold was originally proposed in 2007 after a committee chaired by Andrew Crockett recommended the IMF adopt a new funding model. The IMF said on its website its finances had become unsustainable after a decline in its lending business.

With more countries now seeking IMF assistance to ward off the effects of the global financial crisis, there is speculation that as this business picks up, it will roll back its plans to sell bullion.

"It is possible that the issue of gold sales to plug a funding gap that is disappearing ... and which are already two years down the line from the Crockett Committee's report, could be put on the back burner," metals consultancy VM Group said in a report.

"At the very least, the IMF's renewed relevance has strengthened the case of those who oppose such sales," it said.

Gold was quoted at $946.25/8.25 at 1821 GMT on Wednesday.

The fund has said repeatedly that sales would be made under the umbrella of a central bank gold agreement to avoid disruption to the market.

The existing Central Bank Gold Agreement, which limits gold sales by central banks to ensure the market is not flooded with bullion, is in its final year and is due to expire in September.

Analysts say the IMF's desire to sell gold is a major indicator that a further agreement will be signed, despite sales hitting a historic low last year as central banks hung onto the precious metal as a 'safe' reserve asset.

Members sold 357 tonnes of gold in the year to September 2008, well below the annual limit of 500 tonnes.