| 21 April 1999
CONGRESSIONAL
SUB-COMMITTEE HEARS ARGUMENTS AGAINST IMF GOLD SALES
World Gold Council Argues Sales May Harm Nations
IMF Seeks To Help
WASHINGTON - The issue of possible gold sales by the IMF to finance its
contribution to the HIPC initiative (the provision of debt relief for
the Heavily Indebted Poor Countries) came under close scrutiny by a Sub
Committee of the U.S. House of Representatives Committee on Banking and
Financial Services in Washington today.
Appearing before the Domestic and International
Monetary Policy Sub-Committee, George Milling-Stanley, Manager, Gold Market
Analysis, World Gold Council, argued strongly that gold sales from the
IMF would harm rather than help the 41 HIPC nations concerned, many of
whom are heavily reliant upon gold mining for export earnings.
He said that the sale of gold from the IMF
reserves would bring further deterioration in the gold price, which in
turn would impact on the national economic well being and employment in
these countries.
"It would be a cruel irony if the assistance
that is being offered to the world’s poorest countries in fact did
further damage to these already troubled economies and deterred investment
in gold mining which is potentially of enormous benefit to these nations,"
he said.
Mr. Milling-Stanley pointed out that faced
with limited manufacturing capability, the development of a viable gold
mining industry was an attractive proposition for any HIPC nation. "Aside
from boosting export earnings, it attracts inward investment, creates
jobs and causes remote areas to be opened up. Through the development
of transportation links, whole regions can move away from a purely subsistence
economy," he said.
Touching upon the wider implications for
the industry, Mr. Milling-Stanley said, that the fear of sales of gold
from official reserves is the primary reason for the gold price falling
to its lowest point in 20 years. "The danger in a sale of gold by
the IMF lies in the signal it would send. It would be perceived as a powerful
indication that the official sector around the world had finally renounced
its belief in gold’s role as a monetary asset. Such a sale would
likely be seen as the thin end of the wedge and the market would assume
that further disposals both by the IMF and central banks around the world
would inevitably follow. There can be no doubt the price would fall significantly,"
he said.
Mr. Milling Stanley pointed out that the
IMF holds 103 million ounces of gold making it the third largest holder
in the world behind only the U.S. (262 million ounces) and Germany (112
million ounces). The original intention was that the IMF’s contribution
to the HIPC initiative would come by grants and loans from wealthy IMF
members. If such member contributions were not sufficient, the Fund’s
Executive Board has discussed the possibility of selling up to 5 million
ounces of gold –the profits of which (i.e. anything over $42.20 per
ounce) would be invested to generate income to finance the Fund’s
contribution.
Mr. Milling-Stanley said that there was
no clarity at this stage with respect to additional bilateral contributions
and even if sufficient bilateral contributions became available, there
were several alternatives that the Fund could consider, including borrowing
from commercial banks, changing its rules to allow it to pledge some of
its gold against currency loans and using its credit worthiness to underpin
a bond issue that would be earmarked for debt relief.
Importantly, said Mr. Milling-Stanley, many
people would perceive the sale as weakening the Fund’s capital base
and it is reasonable to ask whether further erosion of the IMF balance
sheet is desirable at this time "In the current climate of instability
in global financial markets, this is not the time to do anything that
might be interpreted as threatening the Funds own stability," he
said.
He pointed out that IMF gold sales would
also have an adverse impact on the lives of individuals who hold gold
all around the world – many as a primary form of savings. There were
even potential adverse indications for the U.S. which holds the largest
official reserves of gold in the world and, in addition, ranks second
in terms of global mine production.
He said there was evidence of public concern
over the issue in the U.S. A survey of public opinion carried out earlier
this month by Opinion Dynamics Corporation of Cambridge, Mass., found
that 59% of respondents disapproved of the proposal that the IMF should
sell some of its gold reserves, with 32% expressing strong disapproval.
In his concluding remarks Mr. Milling-Stanley
reminded the Sub Committee that the sale of gold by the Fund required
the support of 85% of the votes on the IMF executive board and that the
U.S. holds over 17% of the weighted voting power. This gives the U.S.
Congress an effective veto over the whole plan.
In urging Congress to exercise their veto,
Mr. Milling-Stanley restated the Council’s conviction that the proposal
to sell IMF gold at this time is deeply flawed. "We believe that
it would hurt the very countries that most need help and will have other
unintended adverse consequences," he said.
Summary of Mr. Milling-Stanley’s remarks:
- The sale of gold, even a small quantity, from the IMF’s reserves
would bring further deterioration in the gold price.
- Gold mining is a viable and productive sector in the economies of
many developing countries, including more than half of the 41 countries
included in the HIPC initiative.
- Gold sales from the IMF would harm, rather than help, the economies
of the HIPCs.
- In several of the HIPCs that do not currently produce significant
quantities of gold, there are advanced plans for major gold mining projects.
- It would be cruelly ironic if the form of assistance chosen should
deter investment in gold mining, which is potentially of enormous benefit
to these economies.
- Gold currently accounts for 5% or more of goods exports from a number
of other developing countries with troubled economies, even though they
are not included in the HIPC initiative. They would also suffer harm.
- Another danger lies in the message a sale by the IMF would send, the
fear that this might be the thin end of the wedge.
- There are alternatives to gold sales by the IMF.
_________
The World Gold Council is an international organization formed and funded
by leading gold mining companies from around the world to increase the
demand for gold.
For further information, please contact George Milling-Stanley in New
York at Tel: (212) 317-3848, Fax (212) 688-0410
E-mail: george.milling_stanley@wgcny.gold.org.
|