One of the changes introduced by the Second Amendment was the almost complete elimination of gold from the Fund's Articles, although it remains an important reserve asset. This article discusses the role of gold in the Fund today and how it is valued.

Gold In the Fund today Gunter Wittich

Gold has been largely removed from the It was also agreed that there would be no The Amendment also abolished the offi- Fund's Articles of Agreement as a basis for action to peg the price of gold in the future cial price of gold of 0.888671 gram of fine transactions, and its role in the exchange and that the total stock of gold in the hands gold per SDR by eliminating the definition system and as numeraire has been elimi- of the Fund and of the Group of Ten coun- of the value of the SDR in terms of gold. nated. This bare statement, however, fails tries and Switzerland would not be in- The value of the Fund's holdings of mem- to bring out the full implications of the creased. The latter agreement entered into bers' currencies is now maintained in terms changes in the role of gold brought about effect in February 1976 for a period of two of the SDR and the value of the SDR is by the Second Amendment of the Fund's years; it was allowed to lapse in February based on a basket of currencies. (For a fur- Articles. More important, it neglects the 1978 in view of the then pending Second ther discussion of the SDR, see IMF Survey, fact that gold remains an important asset Amendment of the Articles. "Supplement on the Fund," September among international reserves that must be 1981, pp. 12-14.) taken into account in the Fund's mandated The elimination of the official price of surveillance of international liquidity. The Second Amendment gold also removed restrictions on dealings The breakdown of the par value system in gold among member countries. Before in the early 1970s led to a prolonged dis- As gold formed such a pervasive element the Second Amendment, monetary author- cussion of possible reforms of the system, in the original Articles of the Fund, the ities were not permitted to purchase gold at including a gradual reduction in the role of changes introduced by the Second Amend- a price higher than that corresponding to gold. The main elements of the consensus ment were numerous. The most important the par value or to sell it at a lower price. on gold that eventually emerged in these of them are the following. Gold was elimi- Thus, in effect, when market prices dif- discussions were nated as the common denominator of the fered from the official price, gold was un- par value system and as the unit of value of likely to be used as a means of payment • that there would no longer be an offi- the SDR (special drawing right). Although between monetary authorities. Under the cial price of gold; there are now no par values, the amended amended Articles, there are no restrictions • that the various obligations of member Articles allow for the reintroduction of ex- on the freedom of monetary authorities to countries to use gold in transactions with change arrangements based on stable but enter into gold transactions among them- the Fund would be abolished; adjustable par values. Any new par values selves or with the market, except for the • that part of the Fund's gold holdings would, however, have to be expressed in general undertaking regarding world li- would be sold for the benefit of developing terms of the SDR or of some other common quidity and the role of the SDR. Moreover, member countries; and denominator: as a legal matter, gold (or the Amendment explicitly forbade the • that another part would be sold to all a currency) cannot be such a common Fund to reestablish a fixed price for gold or Fund members at the official price. denominator. to manage its price in the market.

36 Finance & Development / September 1982

©International Monetary Fund. Not for Redistribution The Amendment, in addition, elimi- which entailed the separation of official a majority of 85 per cent in the Fund's Exec- nated the obligatory use of gold as a means from private markets. utive Board presupposes very wide agree- of payment to and by the Fund. Any use of The Fund, in turn, used its gold holdings ment among the Fund's membership that it in payments must be acceptable to both to support its financial activities. Gold was such sales would contribute to the achieve- the Fund and the members using it, and sold to replenish holdings of currencies, for ment of its purposes. the Fund could accept gold only if ap- example, when large drawings took place A number of proposals have been made proved by a high majority of the voting that also necessitated borrowing under the to use the gold still held by the Fund. These power in its Executive Board (representing General Arrangements to Borrow (GAB). include, to cite a few, the resumption of wide agreement among the Fund's mem- (Under the GAB, which was established in gold sales to member countries at the bership). Its valuation under these circum- 1962, a number of countries agreed to lend former official price; further sales to the stances would be based on prices agreed resources to the Fund in specified circum- market and use of profits from these sales for each transaction "on the basis of prices stances.) It was sold in connection with to provide BOP support to developing in the market." quota increases in order to facilitate the countries on concessional terms; use of The use of the Fund's remaining gold gold payments required for the increased gold sales profits to subsidize interest rates holdings was regulated, and it was laid subscriptions; and gold acquired from on drawings on the Fund by low-income down that part of the Fund's gold holdings South Africa after the establishment of the developing countries; and transfers to would be sold. For additional gold sales, two-tier market was sold to members to as- strengthen the financial base of a substi- the Amendment required a high majority sist in meeting their asset preferences. tution account that was proposed to allow (85 per cent) of the voting power. Subject to At the time of the discussions on reform substitution of international reserves held such a majority, the Fund can sell from its and on the future role of gold in the mon- in the form of foreign exchange into SDR- remaining gold holdings to countries that etary system, the Fund's gold holdings denominated assets. None of these (and were members in August 1975 at the former were equal to more than 150 million other) proposals so far has found the re- official price in proportion to their quotas ounces, or 4,710 tons. The Fund was, in quired broad support among the Fund's on that date or to members or others at a fact, the second largest official holder of membership. price based on prices in the market. The gold in the world after the United States. Valuation, role in world liquidity Amendment also specified potential uses As part of the consensus on the reform and for proceeds of the sales in excess of the as a contribution toward reducing the role Gold continues to form a substantial part former official price. These uses include of gold, it was decided in 1975 that one of the international reserve holdings of a temporary income-producing investments; third of the Fund's holdings, or 50 million number of central banks. Since gold hold- assistance to developing members in diffi- ounces, should be sold. ings are very unevenly distributed, the im- cult circumstances; and addition to the One sixth, or 25 million ounces, were to portance of its share in individual country's Fund's general resources for its normal be sold to the market for the benefit of de- reserve holdings varies greatly. Almost operations, accompanied by a proportion- veloping countries. Another 25 million four fifths of official stocks are held by the ate increase in quotas. ounces, in an operation somewhat mislead- countries of the Group of Ten (industrial The concern that dealing in gold by the ingly called "restitution," would be sold at countries); holdings of other countries are Fund might seem to establish a new official SDR 35 an ounce to all member countries. generally small in absolute amount and in price gave rise to the circumscription that The gold sales were carried out over the relation to other forms of international gold sales be made "on the basis of prices four years from June 1976 to May 1980. reserves. in the market" rather than "at the market During most of this period, gold prices con- Although gold remains an important price": this was intended to specify that in tinued to rise. The Fund, in Order to avoid part of international reserves, a large ele- its transactions in gold the Fund should any appearance of seeking to manage the ment of uncertainty attaches to the exact seek to follow rather than determine or price of gold in the private market or even value of gold holdings. Two factors in par- even direct prices in the markets. But the of taking a view on future price develop- ticular have introduced substantial uncer- Amendment went one step further and in- ments, sold the gold through a series of tainty: the abolition of a fixed and guaran- cluded an undertaking that members col- public auctions. teed price at which monetary authorities laborate with the Fund and with other The Fund held 45 auctions in all, at prices are assured they can buy or sell gold and members with respect to reserve assets, so very close to London fixing prices. Pro- the narrowness of the private gold market as to achieve better surveillance of inter- ceeds of these gold sales amounted to and consequent potential for sharp fluc- national liquidity and to promote the role US$5.7 billion, of which $1.1 billion repre- tuations in the market price if sales of of the SDR as the principal reserve asset in sented the capital value of SDR 35 an ounce substantial amounts should be found the international monetary system. which was added to the Fund's general re- necessary. sources. $4.6 billion represented profits Monetary authorities, hence, are no Gold sales program that were channeled to the Trust Fund, lo'nger certain that they can mobilize their When the Fund was founded, gold which was established in 1976 to make gold reserves for settlement or intervention formed the ultimate reserve asset and it balance of payments (BOP) assistance purposes at a known price. Gold can be was considered important for the financial available to eligible developing member used as collateral for loans from other mon- strength of the institution that member countries. etary authorities or from commercial countries pay part of their subscription in The Fund's gold sales program was com- banks, but the value that will be attached to gold. A number of other payments, such as pleted in May 1980, and its present gold it is not known in advance. charges or specified repayments to the holdings amount to about 103 million It is therefore not surprising to find a Fund also had to be made in gold. The ounces. These holdings contribute to the great diversity in the valuation of gold in Fund also acquired gold in a variety of Fund's financial strength and to its ability official reserves. Of the 109 countries re- other ways, including purchases from to borrow additional resources to meet its porting official gold holdings to the Fund, South Africa after the introduction in 1968 members' needs. The requirement that fur- 56 countries, which hold about 48 per cent of the two-tier gold market arrangement, ther gold sales by the Fund be agreed to by of reported gold reserves, continue to ac-

Finance <& Development / September 1982 37

©International Monetary Fund. Not for Redistribution count for their holdings at the former offi- ket valuation by countries that had not al- cial price. Of the 35 countries that value ready done so. Gunter Wlttich gold holdings at market-related prices, 22 For the Fund, the question of valuation of use the latest market price, or an average of gold arises in a number of contexts. The prices over a recent period, and 13 use mar- amended Articles prescribe the manner of ket or average prices reduced by a discount valuation of gold for some purposes but for which ranges from 5 per cent to 35 per cent. others leave the choice of method to a later The remaining 18 reporting countries use a a citizen of the Federal decision. The valuation of gold under the variety of other methods to set the value of Republic of Germany, is amended Articles is thus not a simple or their gold holdings. Assistant Treasurer in the unitary one but rather one that permits the Fund. Before joining the Finally, members of the European Eco- application of different principles as the cir- Treasurer's Department, nomic Community have deposited 20 per he worked in the Fund's cumstances may require. In its financial cent of their gold holdings and their foreign Exchange and Trade Relations Department. He statements, for instance, the Fund con- exchange reserves with the European Mon- studied and lectured at the University of California tinues to value its holdings at SDR 35 an etary Cooperation Fund in return for an at Berkeley where he received a Ph.D. in economics ounce. The same value is used in. connec- equivalent amount—valued at market in 1966. tion with the Fund's financial operations prices—of European currency units with member countries, which call for a (ECUs), which means at least a partial mar- consistent and independent valuation of members' reserve holdings: when it ex- tends loans in support of stabilization pro- grams, the Fund uses SDRs and the currencies subscribed by its member coun- tries. Particular currencies to be used dur- Adjustment and Financing ing given periods are determined on the basis of members' balance of payments in the Developing World: strength and reserve holdings. But for this The Role of the International Monetary Fund judgment gold has to be valued consis- tently and thus independently of the valu- edited by Tony Killick ation attached to it by the member itself. The Fund uses the price of SDR 35 an ounce Papers of a seminar jointly arranged by the Overseas Development Institute for this purpose. and the International Monetary Fund, held in Croydon, U.K., October 1981 Another difficult but important applica- tion of the valuation of gold is in the ap- Contents praisal by the Fund of the adequacy of in- An Overview ternational liquidity. Such appraisals are by Tony Klllick and Mary Button undertaken periodically and published in Disequitibria, Financing, and Adjustment in Developing Countries the Fund's Annual Reports. They are also by Tony Killick and Mary Sutton necessary in conjunction with decisions to allocate SDRs and in the quinquennial re- Economic Management and International Monetary Fund Conditionality views of Fund quotas. Here the valuation of by Manuel Guitian gold presents particularly difficult issues Alternative Approaches to Short-Term Economic Management and rather than attempting to establish any in Developing Countries general guidelines, the Fund has handled by Daniel M. Schydlowsky the method of valuation on an ad hoc basis Roles of the Euromarket and the International Monetary Fund depending on the purpose of the analysis. in Financing Developing Countries It has often been found useful to present by Richard O'Brien more than one measure. In its Annual Re- Some Issues and Questions Regarding Debt of Developing Countries ports, for example, the Fund in recent years by Bahram Nowzad has given data on gold holdings both in physical terms or at the constant value of The Position and Prospects of the International Monetary System SDR 35 an ounce and at market prices. in Historical Context The valuation of gold in international re- by Brian Tew serves, whether for individual countries or Developing Country Interests in Proposals for International Monetary Reform in the aggregate, thus clearly has become by Graham Bird more complex. It is also an area that is of 232 pages, US$12.00 (doth) ISBN 0-939934-18-3 (cloth) great importance not only to individual US$8.00 (paper)* ISBN 0-939934-19-1 (paper) countries, whether or not gold forms an *Spedal price to university libraries, faculty, and students; US$4.00 (paper only) important part of their reserves, but to the system as a whole. It is for this reason that Copies of the above publications are available from: one might expect it to be a question that Publications Unit, International Monetary Fund, will continue to be of concern to the Fund's Box A-100, Washington, DC 20431 U.S.A. member countries in order to promote a better international surveillance of inter- national liquidity.

38 Finance & Development / September 1982

©International Monetary Fund. Not for Redistribution