What IS The Imf
The IMF was formed in 1944, and it has the 3rd largest gold reserves in the world after USA and Germany. The role played by IMF is very sensitive and important to global economy, which explains why the IMF would need such a huge gold reserve. You see, the IMF acts as a shock absorber, meaning that it usually comes in when there is a global financial crisis and helps restore things back in order. It is important to note that, the IMF would not just stand in and allow huge global financial crisis to happen under its watchful eye. The reason why the IMF was formed in the first place is to help prevent such a thing from happening. However, sometimes global crises situations are hard to predict and this is the reason why the IMF is always prepared with a huge gold reserve, because in a crisis such as a world war, paper currency becomes useless. This actually explains why the IMF was formed after World War II. The organization was charged with the responsibility of offering Financial and Economic advice to help prevent member countries from soaring into financial debt crisis and also offering financial help to countries facing huge financial difficulty. Such a sensitive role therefore requires the organization to have a huge gold reserve.
Imf Gold – The Pillar of Finance?
There`s plenty of reasons why the IMF has a huge gold reserve, which is something the ancient people knew quite well. Use of gold as currency can be traced back to Ancient Turkey, and the Egyptians who used gold as a means of trade. The following properties explain why gold was and is still highly rated, and continues to be stored in Bank`s reserves:
It is rare
For something to qualify as a currency, it has to be rare, such that it is hard to find, but again not too hard to find. Gold is a very rare metal, but it is available in just the right quantity. It is found deep in the earth`s crust, in tiny particles, and the methods of mining and extracting it are also challenging. This therefore qualifies gold as just the perfect metal for use as currency.
It does not rust
It is possible to store gold for centuries, and it will remain intact, because it is not susceptible to agents of rust.
It does not alter in size, shape, texture or color, meaning that it retains its original properties same way you left it. The golden jewelry buried with ancient Egyptian Pharaohs in tombs is still the same it was thousands of years ago.
It is not corrosive
Malleability- this means that it may be hammered hard, without any sign of a single crack.
The physical attributes above make gold a very precious metal worthy to be used as a currency.
It is a pure metal
How the IMF acquired its gold reserves
A lot people usually wonder how the IMF came to be in possession of such an enviable gold reserve. The answer to this is actually very easy. You see, the membership requirement while joining the IMF is through a certain quota, which has to be paid in the following criteria; a quarter(25%) of it has to be paid initially in the first phase while joining, while the rest may be paid at a later time, using a country`s own currency. Today, the 1st quarter has to be paid in USD, while the rest may be paid in the country`s currency. However in the past, the 1st quota could only paid in gold and the IMF was therefore able to acquire a lot of gold in the process.
Additionally, interest earned on credit extended to a member country by the IMF was usually paid back in form of gold. This way, the IMF was able to accumulate a lot of gold within just a short period of time and this served as a measure of value and credit worthiness.
Another way the IMF was able to accumulate its gold was through repayment of credit. Borrowed funds had to be paid back in form of gold.
Importance of IMF Gold
Gold plays a huge role at the IMF. This is why most European countries whose economic prospects are dwindling by the day continue to hold more voting rights at the organization, at the expense of emerging economies such as China, India and Brazil. The EU has a combined gold reserve of almost 10,000 tons, and the individual European nations also hold a sizable amount of gold in their possession. This therefore gives them a higher voting and decision making power at the IMF, because gold is still considered as a very strong pointer of economic might.
Critics would definitely dispute this fact, and totally support the emerging economies in their quest for a higher status at the organization, but they fail to consider the fact that gold is the heartbeat of the IMF. In cases of anarchy or a global crisis such as another world war, paper currency might turn out to be useless and gold would be the currency of last resort.
Gold is actually still used to determine a nation`s wealth, although this is usually spoken in hushed tones. If you have a strong currency, a flourishing economy backed up by a huge gold reserve, the IMF is all yours. You may have a voice at the organization.
Gold is of much importance to the IMF, a fact which explains why 36 years since the organization stopped actively trading in gold, IMF still holds the 3rd largest gold reserve in the world. This also explains the reason as to why after Germany had invaded Belgium and France, it went for their gold reserves.
Having such a strong gold reserve gives the IMF immense power. If the IMF decided to sell all its gold, this would definitely affect the global economy. Gold prices in the world market would hit an all-time low, which explains why gold companies are always jittery every time the IMF announces sale of a portion of its gold. However, this gold is very important to the global economy, because it may be used as a financial instrument in cases of a global financial crisis or inflation. In such situations, the IMF may decide to sell the gold in order to bail out member countries.
What makes gold so special?
It is stable investment- gold is a secure and stable asset
Its value rarely depreciates
It is easily convertible to cash
It is a show of credit worthiness. This fact explains why India and Sri Lanka rushed to bid and purchased a huge portion of gold when the IMF announced to trade part of its gold. Having a sizable gold reserve boosts investor confidence, since it is a show of a country`s credit worthiness (ability to meet its debts).
Reasons why the IMF still holds its gold reserves
To meet its financial obligations
In anticipation of unexpected financial crisis/situations of global financial con-stringency
Sale of a portion of the gold may be used to fund urgent financial needs, such as supporting nations which are in dire need of financial aid.