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Category: Bullion Bulletin

Bullion Bulletin: IMF gold gets eyed up again

As more and more countries struggle with their accumulated vast foreign debts, it's no wonder that one of the world's biggest holders of gold – the...

22 January 2023

Gary Mead

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As more and more countries struggle with their accumulated vast foreign debts, it’s no wonder that one of the world’s biggest holders of gold – the International Monetary Fund (IMF) is once again coming under pressure to offload some of its gold, valued at more than $4 billion, to fund debt relief.

Lebanon, Russia, Suriname and Zambia are already in default, Belarus is on the brink. Last year, Sri Lanka defaulted on repayments of its $50 billion foreign debt; Ghana suspended payments on most of its $28.4 billion external debt last December. Pakistan’s external debt is now more than $138 billion and servicing that debt costs more than $15 billion a year. It’s estimated that as much as $400 billion of debt owed by countries to foreign creditors is in play, and more than 40 nations are at risk of default.

Carmen Reinhart, former chief economist with the World Bank, said last June that there are “more Sri Lankas on the way… There are a lot of countries in precarious situations… I do think things will get worse before they get better… My sense is that we will see more difficult times before we turn the corner”.

How did the world get into this position? Like so many simmering crises we have to go back to the Great Financial Crash of 2007 and its aftermath. Governments responded to that crisis by slashing interest rates, making it cheap for everyone – including sovereign states – to load up on debt. The recent high inflation around the world has forced central banks to start putting up interest rates, and countries (already burdened by high costs for energy and food) are now in debt distress – trying to restructure their debts or falling behind on interest payments.

This high indebtedness is prompting a number of responses, including a call for the IMF to conduct “modest” gold sales to “benefit Africa and LICs”. But it’s obvious that even if the IMF sold all 90.5 million ounces (valued at somewhere around $4 billion ) of its gold, that would barely touch the sides of the current emerging markets’ ticking debt bomb.

In the past, the IMF has sold gold for debt relief; in 2009-10 the IMF sold an eighth of its gold, some 403 tonnes, for about $15 billion. The proceeds were channelled through the IMF’s Poverty Reduction and Growth Trust (PRGT), which aims to provide support for low-income countries (LICs). Under the IMF’s Articles of Agreement it can only conduct gold sales with 85% support from its Executive Board – and getting that kind of support now, with a war raging in Europe making everyone nervous, would not be easy.

But even if the IMF voted a new round of gold sales, in the current geo-political context that’s unlikely to dent the price by much or for very long. Central banks have been buying gold in record volumes – 400 tonnes in one quarter last year, the same as they would normally buy in a whole year. As one Bloomberg commentator put it in November: “In a world where you can trust no one, it makes sense to bulletproof yourself with metal”. When the IMF made its 2009-10 sales the Indian central bank snapped up 200 tonnes and other central banks – including that of Sri Lanka – took the rest. The gold price averaged some $972 in 2009; last year it averaged more than twice that.

So if the IMF doesn’t have enough gold to solve the record $300 trillion global debt, what will happen? Some argue that the only solution will be a ‘great reset’ in which policymakers come together to orchestrate some form of debt write-offs. If that doesn’t happen then we will watch the dominoes topple this year – and gold is likely to become more important as a defensive asset.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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