Donna Block
SHARE WORLD
‘Zip, zap, zum,” said the magicians at my son’s birthday party. Now you see it, now you don’t. They made things disappear and reappear, turned paper into flowers and fire into a bottle of Coke, truly amazing. They entertained and kept the kids quiet with their amazing feats. But at the end of the day, we all know that magicians use smoke and mirrors and sleight of hand and the illusion gives the desired affect.
Anyone who is trying to figure out how the International Monetary Fund (IMF) plans to fund the debt relief initiative for 41 of the world’s poorest nations by revaluing its stash of gold should probably ask the wacky wizard since much appears to be illusion.
The IMF has been desperately trying to revitalise its balance sheet after having lent billions to cash-strapped emerging market nations. When it announced that it would sell 10-million ounces of gold to fund debt relief it came under immediate attack from the gold industry and United States lawmakers. The IMF knew that without congressional approval the sale would never come to pass and so earlier this month it opted to abandon the sale. Instead it has come up with a plan to “revalue” its gold. It’s a feat of magical accounting and works like this:
The IMF carries its gold at the 1973 value of $48 an ounce, dating back to when the gold came to the fund from its member nations. A big difference between that and the current market price of $255.
The IMF will sell at least 10-million ounces of gold at the prevailing market price to countries, such as Mexico, who owe the IMF money from past loans. These countries would then buy IMF gold the day before loan payments are due and then repay the loan the next day with the same gold. The countries would pay cash to the IMF for the gold and then turn around and give the gold back to the IMF to satisfy their debts.
The scheme raises cash for the IMF because the fund values gold on its balance sheet at $48 an ounce. Since gold is actually worth about $255 an ounce, the transaction would give the IMF a profit of $207 an ounce, or about $2,1-billion. The gold also never actually leaves the IMF vaults and would never hit the open market so the price of gold should remain unaffected.
Once the gold is sold, the fund would return $48 per ounce back to its general resource account and then transfer the profits of $2,1-billion to a trust fund. The trust would invest the $2,1-billion and use the proceeds to fund the debt relief initiative and help fund its low interest loans to developing nations.
Under the plan, the IMF’s gold holdings, as measured in ounces, would not change. But the value of this particular 10-million ounces would change greatly, rising to $2,25-billion from $480-million. Did you see that? Zip, zap, zum, it’s magic.
According to John Lutley, president of the Gold Institute in Washington DC, this scheme is a “good alternative to selling gold into the market”, but he added “there are still issues that have to be raised – like what if a member country doesn’t have the cash to pay its loan instalment and defaults on its obligations”.
Moreover, not everyone is pleased with the plan. A Republican member of the US House of Representatives called the plan “voodoo economics” and stated that it would be as devastating to the gold producers as the original plan.
Other US opponents say they’re against the IMF’s increasing global role and this plan should be rejected at least until all questions are answered about the possible misuse of IMF loans in Russia and Indonesia.
Economists are also a bit rattled by the revaluation plan and have raised the question of what the IMF does with the rest of its gold. Ten million ounces is only 10% of their holdings: do they keep the other 93-million ounces on their books at $48 or value it at $255? How can it possibly have two values?
Some are accusing the IMF of crossing into the world of financial smoke and mirrors.
Nonetheless, the IMF plan will be considered by its 182 members at its annual meeting at the end of this month.
It is making a valiant effort to please everyone – the gold industry, gold producing nations and lawmakers – and if it’s able to pull this one off it will truly be magical. Think the IMF does birthday parties?