By David Lew
Not a single day passes, perhaps, without the bullion markets around the world discussing gold reserves, the yellow metal price boom and which country will next buy gold from the International Monetary Fund (IMF). Why is IMF gold a hot commodity these days?

Ever since India bought 200 tonnes of gold from IMF last month, there have been heated discussions and speculation that several countries and central banks around the world are queuing up to amass gold from IMF in an attempt to build their foreign exchange reserves in the wake of weakening US dollar. Most countries including India and China—the two largest gold consuming nations in the world—have US dollar as most part of their foreign exchange reserves kitty. Now, China, India and other countries want to move away from dollar to gold, for all perceive gold as a stable currency than a hot commodity!

The most aggressive player in the gold reserves game these days is, of course, China. Though China is not keen to buy gold from IMF at the high price that gold is ruling these days, the People’s Bank of China is stepping up efforts to build up gold reserves by buying the yellow metal from the market and taking various initiatives to increase gold mining across the country. China has targeted to mop up a whopping 10,000 tonnes of gold reserves by 2020.

Which are the countries that own the largest quantity of gold reserves now? Check out here:

**America is the world leader in gold reserves. The United States has 8133 tonnes of gold reserves as on September 2008 that accounts for 76.5% of its foreign exchange reserves.

**Germany has the second highest gold reserves at 3412.6 tonnes.

** France has 2508 tonnes of gold constituting 58.7% of its forex assets.

**Italy has 2451.8 tonnes of gold constituting 61.9% of forex reserves.

**China became the fifth biggest holder of gold reserves with 1054 tonnes.

**Switzerland has 1040 tonnes of gold reserves constituting 23.8% of total forex reserves.

**India which recently bought 200 tonnes of gold from IMF has 557 tonnes of gold reserves representing 3% of total forex reseres.

** The IMF, which currently holds 3,217 tonnes of gold, is the third-largest official holder of the precious metal. The IMF has made gold sales a key element of its new income model aimed at lowering its dependence on lending revenue to cover expenses.

I have been getting lots of e-mails asking for details on what is this fuzz all about IMF gold and how is it that the international organization possesses gold. Following is a brief on IMF gold holdings, culled out from the IMF documents:

How did IMF acquire gold holdings?
The IMF holds 103.4 million ounces (3,217 metric tons) of gold at designated depositories. The IMF's total gold holdings are valued on its balance sheet at SDR 5.9 billion (about $9.2 billion) on the basis of historical cost. As of August 28, 2009, the IMF's holdings amounted to $98.8 billion at current market prices.

A portion of these holdings was acquired after the Second Amendment of the IMF's Articles of Agreement in April 1978. This portion, amounting to 12.97 million ounces (403.3 metric tons) with a market value of $12.4 billion as of August 28, 2009, is not subject to restitution to IMF member countries (see below), unlike gold the IMF acquired before 1978.

The IMF acquired the majority of its gold holdings prior to the Second Amendment through four main types of transactions.

• First, when the IMF was founded in 1944 it was decided that 25 percent of initial quota subscriptions and subsequent quota increases were to be paid in gold. This represents the largest source of the IMF's gold.

• Second, all payments of charges (interest on member countries' use of IMF credit) were normally made in gold.

• Third, a member wishing to acquire the currency of another member could do so by selling gold to the IMF. The major use of this provision was sales of gold to the IMF by South Africa in 1970–71.

• And finally, member countries could use gold to repay the IMF for credit previously extended.

The IMF's legal framework for gold
Role of gold. The Second Amendment to the Articles of Agreement in April 1978 fundamentally changed the role of gold in the international monetary system by eliminating the use of gold as the common denominator of the post-World War II exchange rate system and as the basis of the value of the Special Drawing Right (SDR). It also abolished the official price of gold and ended the obligatory use of gold in transactions between the IMF and its member countries. It furthermore required that the IMF, when dealing in gold, avoid managing its price or establishing a fixed price.

Transactions. Following the Second Amendment, the Articles of Agreement limit the use of gold in the IMF's operations and transactions. The IMF may sell gold outright on the basis of prevailing market prices, and may accept gold in the discharge of a member country's obligations (loan repayment) at an agreed price, based on market prices at the time of acceptance. Such transactions require Executive Board approval by an 85 percent majority of the total voting power. The IMF does not have the authority under its Articles to engage in any other gold transactions—such as loans, leases, swaps, or use of gold as collateral—nor does it have the authority to buy gold.

Restitution. The Articles also provide for the restitution of the gold the Fund held on the date of the Second Amendment (April 1978) to those countries that were members of the Fund as of August 31, 1975. Restitution would involve the sale of gold to this group of member countries at the former official price of SDR 35 per ounce, with such sales made to those members who agree to buy it in proportion to their quotas on the date of the Second Amendment. A decision to restitute gold requires support from an 85 percent majority of the total voting power. The Articles do not provide for the restitution of gold the Fund has acquired after the date of the Second Amendment.

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