The IMF is an international institution founded in 1946 and managed by its Board of Governors, providing relief for poor countries around the globe.
Prior to 1978 amendment of Rule F-1, Members paid gold as part of their initial subscriptions to the Fund and this gold was delivered directly to depository accounts designated by each Member.
It is a safe haven
Gold has long played a pivotal role in international monetary systems. While today’s system differs drastically from that of 19th-century systems, global stability requires collaboration among nations for its maintenance.
The IMF keeps its gold stored in designated depositories. At its establishment in 1944, Member countries paid 25% of their initial quota subscriptions in gold as well as using gold to pay interest on loans they were granted from the IMF – these payments comprised the primary source of its gold reserves.
In April 1978, the IMF implemented its Second Amendment to its Articles, By-Laws and Rules and Regulations that included an overhaul of its gold depository rules. As part of this revision process, current Rule F-1 was renamed while E-1 had been dropped entirely; at this time early drafts of Rule F-1 listed New York, London, Paris as potential depositories while South Africa expressed interest in hosting one as well.
It is a store of value
Gold can serve as a store of value that can withstand periods of crisis, fluctuation and inflation. Unlike paper money which can easily devalued or counterfeited, which creates uncertainty for investors over time; gold serves as an insurance against inflation or default for its holders.
As the IMF was initially established at the conclusion of World War II, its foundation was a modified form of the gold standard. Each country established their legal gold valuation for their currency and registered it with the IMF; these valuations then served to determine parities of exchange among currencies.
Between 1946 and the 1970s, the IMF amassed its gold holdings through members’ initial and periodic quota subscriptions to the Fund, along with various increases. Their gold is stored at designated depositories in New York, London, Shanghai, Paris and Bombay; these locations were selected because they reflected the five largest quota holders at Bretton Woods Conference time.
It is a backstop for creditors
IMF gold reserves are a vital bulwark against creditor claims against the Fund, with 90.5 million ounces stored across various depository accounts worldwide. Even if some modest quantities were sold off-market to central banks for subsidy purposes, such sales would likely have minimal effect on global gold prices and would likely occur gradually over time.
At its creation, countries made payments totalling 25% of their initial and subsequent quota quotas in gold, as well as payments for increases. These payments account for most of the IMF’s gold holdings today.
Early drafts of the IMF’s Rules and Regulations recommended gold depository locations be limited to New York, London, Shanghai, Paris and Bombay as initial priorities from an operational point of view. Moscow and South Africa were also considered, though neither joined until after 1946.
It is a currency
Gold is not technically a currency, but it plays a vital role in international monetary systems. Under the classic gold standard system, countries fixed their exchange rates against it while allowing its price to fluctuate freely on markets outside its official price window. Central banks sold and bought gold to maintain equilibrium among their reserves – this process became known as “The Gold Pool.” Individuals and private entities can hold SDRs, but cannot buy and sell them like any commodity would.
There are various factors that contribute to the proportion of central bank reserves a country holds in gold, such as transaction costs, relative returns, economic/financial uncertainty and geopolitical events. This paper uses econometric analysis on aggregate data to examine trends in gold’s share of international reserves; additionally panel data allows us to assess its effect across country-level variables; for instance we find trade openness is associated with lower gold shares in emerging markets than advanced economies.
