Gold investing is more popular than ever before. Long seen as a hedge against economic uncertainty, the precious metal has become an increasingly common investment vehicle in the wake of the Great Recession and the seemingly endless instability plaguing the world today. Fearful investors are much more willing to invest in gold now when they see signs of elevating market turmoil, even in the short term; last August’s stock corrections saw a surge into gold in numbers normally reserved for major recessions. There are also more gold investment instruments available now than in the past, when owning gold usually meant securing some form of coins or bars through authorized dealers, often with high commissions. Gold investors today can choose to instead buy gold exchange traded funds, or ETFs, or a myriad of gold mutual funds, all easily traded through the brokerage account they use to manage their other assets. Like any investment however, it is important to understand how the gold market works, and what factors affect it. One major element to be aware of in gold investing is the International Monetary Fund, or IMF. The IMF has long played a key role in the gold market, due to the way it manages its tremendous gold reserves as well as through the economic effects of its various policy actions. Understanding the IMF’s outsized impact on the gold market is thus critical for all gold investors.
The International Monetary Fund has immense gold holdings. In fact, its 2,814 metric tons of gold are larger than all other government or institutional holdings in the world, save for the United States’ and Germany’s reserves. It acquired these holdings through subscription quota requirements adopted at its inception in 1945, as well as through continuing policies allowing IMF members to use gold for payments or to acquire other IMF members’ currency. The IMF’s gold holdings and its ability (and at times propensity) to sell large quantities of gold can have an outsized effect on the market. Like any central bank, if the IMF decides to sell a significant portion of gold at any time, the increased supply of gold in the marketplace could sharply depress gold prices. Even speculation of IMF gold sales can cause serious disruptions in the gold market. In 2005 and 2011, for example, concerns about impending IMF gold sales drove the precious metal’s price to yearly lows. The IMF chooses to sell gold from time to time, and impending sales are usually telegraphed through the media as well as the intense lobbying efforts for and against the sale by the major stakeholders involved. It is important for investors to pay attention to the IMF’s actions concerning gold sales, since they can have a major impact on the overall gold market.
International Monetary Fund policy actions in themselves can also affect the gold market in ways beyond outright gold purchases and sales, and bear close scrutiny when making investment decisions. The IMF’s propensity to stabilize ailing, chaotic economies plays a key role in how long term economic outlooks are perceived, and thus affects the price of gold. The decision to support the $146 billion Greek bailout in 2010, for example, is viewed by many analysts to have put a damper on prospects for higher gold prices that year. Additionally, the IMF’s ability to grant a country’s currency IMF reserve status is another policy action the institution makes from time to time that could have major implications for the gold market. IMF global reserve status signals that a country’s economy is liberalized and a safe haven for foreign investment, and increases the ability of that currency to trade worldwide. A country seeking this status, and the special drawing rights (SDR) privileges it enables will likely take a series of long term measures to ensure that its currency is deemed stable enough for admittance. One of these measures may be to accumulate a significant amount of gold to back up its currency. Additionally, upon seeking its currency’s admittance into the IMF, the country will be required to publicly disclose its gold reserves. Both of these actions could have immediate effects on the price of gold worldwide. The IMF designated China’s yuan a global reserve currency earlier this year, and gold investors would be wise to track closely the impact of this announcement on the market.
Another reason gold investors should monitor the IMF is because the IMF watches everyone else. One of the key roles of the IMF is surveillance, or the monitoring of its member nations’ policies and economic activities in order to forestall preventable economic instability. IMF members are required to maintain a level of transparency in terms of their monetary policies, fiscal activity, and levels of gold reserves. The International Monetary Fund also conducts surveillance at the regional and global levels, constantly monitoring trends and gauging the economic outlook of countries across the globe. The IMF produces many well-regarded summaries of economic trends, from the World Economic Outlook, to the Global Financial Stability Report, as well as various detailed regional reports. Gold investors should familiarize themselves with these reports, and take advantage of the IMF’s sound analysis as they attempt to determine trends and make critical investment decisions. Additionally, the IMF’s forecasts themselves may at times have a n effect on gold and other markets. There is a significant body of scholarly work that suggests forecasts from respected institutions can have an impact on markets, and gold is no exception. For this reason, and for the information in the forecasts themselves, prospective gold investors should read IMF reports closely.
The International Monetary Fund has maintained a critical relationship to gold and the gold market since its beginning in 1945. The fact that it manages one of the largest gold holdings in the world is reason alone for gold investors everywhere to pay close attention to the IMF’s actions and pronouncements. Moreover, the IMF’s role as a major force in maintaining or restoring economic stability has a major effect on gold prices, and should be carefully monitored as well. Finally, gold investors everywhere should take advantage of the IMF’s impressive research and surveillance arm, as its informative reports can help guide investors through uncertainty; the reports and forecasts themselves may also affect the gold market. Thus, while it is but one factor in gold investments, the IMF is nonetheless an important institution where gold is concerned, and investors should stay abreast of IMF activities and reports.