The IMF and Gold: Funds Articles Taken to Task At Washington Meeting.

Business Editors

NEW YORK--(BUSINESS WIRE)--Sept. 27, 2001

The International Monetary Fund's attitude toward gold was examined at a special luncheon meeting hosted by the World Gold Council in Washington, D.C. today. Addressing a number of representatives of gold producing and holding countries, Dick Ware, the Council's Manager of Regulatory Affairs, said that the IMF should reconsider its current prohibition against using gold as an exchange rate peg, which, he said, is "anachronistic" and might well be damaging to some developing countries.

Mr. Ware, a former IMF and Bank of England official, has analyzed the operation of the IMF and its use of gold since the Fund's creation in the immediate aftermath of the Second World War. His study, "The IMF and Gold," which is published by the WGC, traces the developments in the Fund's policies and strategies from its beginning in 1946 until the collapse of the Bretton Woods system, which culminated in the early 1970s in a deliberate attempt to write gold out of official monetary arrangements.

Mr. Ware told the Washington audience, which included IMF and World Bank representatives, that the resulting prohibition in the IMF's Articles against using gold as part of a country's exchange rate arrangements is anachronistic and should be dispensed with. For a number of countries it may be sensible to incorporate gold in a currency or commodity basket anchoring the exchange rate.

"We are not talking here about a return to an all-embracing Gold Standard. But for some countries the use, or part-use, of gold in an exchange rate peg might be beneficial. For some developing countries, especially where gold forms a significant part of their exports, establishing some sort of link to its price may make more sense than tracking the dollar and creating an exposure to the effects of US economic policy," he said.

However, such an arrangement would require a change in the IMF's Articles, which would be a "long and arduous process. But times have moved on and there is no longer any need to anathematize gold, especially if its partial use in this way might improve the economic lot of a small number of countries which need all the stability they can get."

The IMF continues to hold gold as it serves an important function in underpinning its financial strength. Mr. Ware says this is especially important today when the Fund is able to make available to members unprecedentedly large multiples of quota. Furthermore, it has remained the majority view of the Fund's members that it is better for it to retain its gold against unknown contingencies rather than to sell it and invest the proceeds elsewhere. The IMF's gold holdings have also recently been used to support the debt-relief programme for the Heavily-Indebted Poor Countries (HIPCs) and Mr. Ware argues that such activities demonstrate that gold is by no means an idle asset.

Central banks are also large holders of gold and, despite some gold sales in recent years, the official sector still holds some 33,000 tonnes of gold, around 25% of the world's total above ground stocks. Of this the IMF holds 3,217 tonnes, about 10% of official sector holdings and a little more than 2% of total stocks.

Mr. Ware says that while one of the reasons why so much gold is still held by the official sector reflects gold's earlier role as an explicit anchor for both domestic and international monetary systems, there is little current desire on the part of many official holders to dispose of their gold. Countries such as the USA, France, Germany and Italy continue to hold significant stocks.

Gold is not a 'mere' commodity, he says. "The major economic powers continue to hold - and see value in holding - gold in their reserves. The IMF's undoubted credit-standing is also supported by the gold in its balance sheet. Gold gives a monetary authority a degree of freedom on a different plane from that obtained by holding reserves in foreign currencies."

"Since no one can foresee what the next 50 years will bring to the international monetary system, the ability of the IMF to respond is paramount," he says. "At that stage gold might once again become a factor and both the IMF and its members would be pleased to have retained it."

The "IMF and Gold" is essential reading for anyone interested in the activities of the gold market and the international financial system. It can be obtained from the World Gold Council at 444 Madison Ave., New York, NY 10022. Telephone: [phone].

The World Gold Council is an international organization formed and funded by leading gold mining companies from around the world to monitor and analyze developments in the gold market and to encourage demand for gold.