Gold in the IMF

Gold played a central role in the international monetary system until the collapse of the BrettonWoods system of fixed exchange rates in 1973. Since then, the role of gold has been gradually reduced. However, it is still an important asset in the reserve holdings of a number of countries, and the IMF remains one of the largest official holders of gold in the world.

The IMF's 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 $8.7 billion) on the basis of historical cost. As of March 31, 2009, the IMF's holdings amounted to $94.8 billion (at then current market prices). A portion of these holdings were acquired since the Second Amendment of the IMF’s Articles of Agreement in April 1978, amounting to 12.97 million ounces (403.3 metric tons), with a market value of $11.9 billion as of March 31, 2009. As noted below, this part of the Fund’s gold holdings is not subject to restitution to members.

The IMF acquired the majority of its gold holdings prior to the Second Amendment through four main types of transactions. First, it was then prescribed that 25 percent of initial quota subscriptions and subsequent quota increases were to be paid in gold. This represented the largest source of the IMF's gold. Second, all payments of charges (i.e., interest on members' use of IMF credit) were normally made in gold. Third, a member wishing to purchase the currency of another member could acquire it 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, members could use gold to repay the IMF for credit previously extended.

The IMF's policy on gold today

The Second Amendment to the Articles of Agreement in April 1978 eliminated 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 brought to an end the obligatory use of gold in transactions between the IMF and its members. It furthermore required that the IMF, when dealing in gold, avoid managing its price or establishing a fixed price.

The Articles of Agreement now 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's obligations at an agreed price, based on market prices at the time of acceptance. These transactions in gold require an 85 percent majority of total voting power. The IMF does not have the authority 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.

The Articles also provide for the restitution of the gold the Fund held on the date of the Second Amendment to members of the Fund as of August 31, 1975. Restitution would involve the sale of gold to this group of members 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.

The IMF's policy on gold is governed by the following principles:

• As an undervalued asset held by the IMF, gold provides fundamental strength to its balance sheet. Any mobilization of IMF gold should avoid weakening its overall financial position.

• The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies.

• The IMF has a systemic responsibility to avoid causing disruptions to the functioning of the gold market.

• Profits from any gold sales should be used whenever feasible to create an investment fund, of which only the income should be used.

How and when the IMF used gold

Outflows of gold from the IMF's holdings occurred under the original Articles of Agreement through sales of gold for currency, and via payments of remuneration and interest. As noted, since the Second Amendment of the Articles of Agreement, outflows of gold can only occur through outright sales. Key gold transactions included:

• Sales for replenishment (1957-70). The IMF sold gold on several occasions to replenish its holdings of currencies.

• South African gold (1970-71). The IMF sold gold to members in amounts roughly corresponding to those purchased from South Africa during this period.

• Investment in U.S. government securities (1956-72). In order to generate income to offset operational deficits, some IMF gold was sold to the United States and the proceeds invested in U.S. government securities. Subsequently, a significant buildup of IMF reserves prompted the IMF to reacquire this gold from the U.S. government.

• Auctions and "restitution" sales (1976-80). The IMF sold approximately one third (50 million ounces) of its then-existing gold holdings following an agreement by its members to reduce the role of gold in the international monetary system. Half of this amount was sold in restitution to members at the then-official price of SDR 35 per ounce; the other half was auctioned to the market to finance the Trust Fund, which supported concessional lending by the IMF to low-income countries.

• Off-market transactions in gold (1999-2000). In December 1999, the Executive Board authorized off-market transactions in gold of up to 14 million ounces to help finance the IMF's participation in the Heavily Indebted Poor Countries (HIPC) Initiative. Between December 1999 and April 2000, separate but closely linked transactions involving a total of 12.9 million ounces of gold were carried out between the IMF and two members (Brazil and Mexico) that had financial obligations falling due to the IMF. In the first step, the IMF sold gold to the member at the prevailing market price and the profits were placed in a special account invested for the benefit of the HIPC Initiative. In the second step, the IMF immediately accepted back, at the same market price, the same amount of gold from the member in settlement of that member's financial obligations. In the end, these transactions left balance of the IMF's holdings of physical gold unchanged.

A Factsheet - April 2009

IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs			Media Relations
Phone:	202-623-7300		Phone:	202-623-7100
Fax:	202-623-6278		Fax:	202-623-6772

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InterOil Increases Condensate Recovery at 2nd Sidetrack of Antelope-1

InterOil reports increased condensate recovery in the second side track of the Antelope-1 well. Drill Stem Test (DST) #11, performed over an interval from 7,529 feet to 7,700 feet (2,295 to 2,347 meters) in the Antelope-1ST2, recovered surges of between 25 to 100 barrels of condensate per million cubic feet of natural gas. Antelope-1ST2 kicked out from the Antelope-1 wellbore at 6,726 feet (2,050 meters) on May 1st and reached the current total depth of 7,700 feet (2,347 meters) on May 5th. The increased gas-to-condensate ratio indicated from this test, which was conducted deep in the hydrocarbon column confirms our original assumptions, which were based on observations from worldwide gas and condensate fields, and support our decision to case the well for further testing.

The formation in which the DST packer was set did not completely seal allowing gas from above to channel into the test interval, resulting in limited testing capability with these DST tools within the large open hole interval. Given the encouraging results of the DST, the company has elected to case the well and isolate the 1,968 feet (600 meters) of gas pay behind pipe. Forward plans are to drill out underbalanced to further test this zone and additional zones of interest in the lower portion of the Antelope reservoir with the improved isolation of a cased wellbore and without further contamination by drilling fluids during managed pressure drilling.

Analysis of the test pressure data and condensate by third parties is in progress. The Company is in the early stages of evaluation and has not yet determined the final volume, and in particular whether condensate volumes would be sufficient to be commercially exploitable.

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InterOil's Antelope-1 Well Flows at Record Gas Rate

InterOil Corporation says that its Antelope-1 well flowed at 382 million cubic feet of natural gas per day (MMcfd) with 5,000 barrels of condensate per day (BCPD) for a total 68,700 barrels of oil equivalent per day (BOEPD), setting a new record rate for the country of Papua New Guinea.

The flow test recorded a maximum calculated rate at 545 MMcfd for a dry gas reading through a 6 inch capacity choke that was only opened to 3 ½ inches or about 30% of capacity. Conservatively adjusting the dry gas flow rate of 545 MMcfd to compensate for 13 Bbls of condensate per MMcf results in the 382 MMcf effective gas flow rate. The company says that as far as we are aware, the world record breaking gas flow rate from a vertical well confirms other records recently established by the well, such as the largest vertical hydrocarbon column height in a single onshore carbonate reef structure and the largest calculated absolute open flow (CAOF) at 17.7 Billion cubic feet of natural gas per day. The well results establish the country of Papua New Guinea as a world class gas resource base in close proximity to the largest and most well developed LNG market in the world.

InterOil believes the Antelope-1 well clearly confirms the gas resource potential sufficient to proceed with plans to build a liquefied natural gas (LNG) plant on company land next to the InterOil refinery. Antelope-1 and previous wells, have confirmed over 120% of full capacity, estimated at 500 MMcfd, for the first proposed LNG train.

Third party resource estimates are underway and will be released when completed in the next few weeks. Recent settlement agreement with Merrill Lynch uniquely positions InterOil to enter direct negotiations with industry partners on an ownership stake in the Elk/Antelope structure, an ownership stake in the proposed LNG plant and long-term LNG offtake contracts.

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Chavez Moves to Take Over Oil Service Companies in Venezuela

May 8 (Bloomberg) -- Venezuelan President Hugo Chavez signed a law to allow the government to seize assets from oilfield services companies and said he’ll start taking over boats and docks on Lake Maracaibo today.

The National Assembly approved the law earlier yesterday, allowing for the nationalization of services including water injection at wells, gas compression and dock control.

“I’m going to enact this law immediately,” Chavez said last night. “We’re going to start to recover these assets, which will become property of the state. Now they’re liberated.”

Petroleos de Venezuela SA, the state oil company, is pressing foreign services companies to lower rates as growing debts hamper oil output. Production in Venezuela, the biggest oil exporter in the Americas, was down 8.4 percent last month from a year ago, according to Bloomberg estimates, and services firms have idled rigs this year because of past-due payments.

Venezuela depends on oil exports to finance half the government’s budget.

Chavez didn’t provide names of companies that would be targeted today.Schlumberger Ltd. and Halliburton Co., the world’s biggest and second-biggest oilfield services companies, both operate in Venezuela. The two companies declined to comment when asked about the new law on May 6.

Boats, Docks
Oil and Energy Minister Rafael Ramirez said the state oil company today will seize 300 boats, 61 diving boats and 39 terminals and docks and other assets used by the oil industry on Lake Maracaibo in Venezuela’s western Zulia state. PDVSA, as the oil company is known, will absorb 8,000 employees from subcontractors.

“These intermediary companies speculated, and took a large part of our oil earnings,” Ramirez said yesterday on state television. “With this, we’ll continue reducing costs in our oil industry.”
Venezuela’s output may fall below 2 million barrels per day for the first time in 20 years, said Patrick Esteruelas, a Latin America analyst at Eurasia Group in New York, in a research note yesterday.

Venezuela has already started expropriating assets this year from services companies that have idled equipment.

Yesterday, John Wood Group Plc, a services company based in Aberdeen, Scotland, said that PDVSA took over one of its contracts, and Houston-basedBoots & Coots International Well Control Inc. said it suspended operations in the first quarter because of past-due payments.

Williams Cos. said on April 29 that it wrote off $241 million for uncollectible Venezuela payments, while Helmerich & Payne Inc. said it may not be able to collect $116 million.
Helmerich has idled seven rigs, while Dallas-based Ensco International Inc. idled one, which was later seized by PDVSA.

Investment Plan
PDVSA cut its investment plan for this year to $14 billion from a previously planned $24 billion on April 28, and in February Ramirez said the company asked service providers to cut their fees by 40 percent after the price of oil plunged.

Chavez has pledged to maintain spending on social programs that provide subsidized food, health care and housing to the poor, even after crude oil prices plunged 61 percent since July.

Crude oil for June delivery rose 37 cents, or 0.66 percent, to $56.71 a barrel on the New York Mercantile Exchange yesterday.

Ramirez said May 6 that Venezuela, a member of the Organization of Petroleum Exporting Countries, supports efforts to raise the price of oil to $70 a barrel.

Angel Rodriguez, a lawmaker and president of the Energy and Mines Commission in the National Assembly, said in an interview May 6 the government won’t expropriate foreign-owned oil and gas drilling rigs.

To contact the reporter on this story: Matthew Walter in Caracas at mwalter4@bloomberg.net
Last Updated: May 7, 2009 23:54 EDT

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Insight: Kazakh bank falls foul of CDS

Mention the word “Kazakhstan” to a trader in New York or London, and the image of Borat is likely to spring to mind.

Right now, though, bankers have a second – more serious – reason to ponder the Central Asian country, aside from the putative mankini-wearing Kazakh traveller who featured in a comedy film.

As the financial crisis virus has swept around the globe in recent months, Kazakhstan’s banking sector has been engulfed in turmoil. This is not just creating a headache for the Kazakh government and Western creditors, but also highlighting issues about the credit derivatives market that extend well beyond those far-flung steppes.

Take the case of Morgan Stanley’s dealings with BTA, Kazakhstan’s largest bank. A few years ago, BTA – like many of its Eastern brethren – was an up-and-coming darling of the capital markets world, with investment bankers furiously competing to float its bonds, provide loans, and much else.

But earlier this year, when funding dried up for Kazakh banks, BTA fell under the control of the government. Initially BTA wanted to keep servicing its loans, and its creditors, such as Morgan Stanley, appeared happy to play along.

But last week Morgan Stanley and another bank suddenly demanded repayment. BTA was unable to comply, and thus tipped into partial default. That sparked fury among some other creditors, and shocked some Kazakhs, who wondered why Morgan Stanley would have taken an action that seemed likely to create losses.

One clue to the US bank’s motives, though, can be seen on the official website of the International Swaps and Derivatives Association. One page reveals that just after calling in the loan, Morgan Stanley also asked ISDA to start formal proceedings to settle credit default swaps contracts written on BTA.

For it transpires that while the US bank has a loan to BTA it also has a big CDS position on BTA, that pays out if – and only if – the Kazakh bank goes into default. Indeed, some of Morgan Stanley’s rivals suspect that notwithstanding its loan, Morgan Stanley is actually net short the Kazakh bank.

As a result speculation is rife that Morgan might have deliberately provoked the default of BTA to profit on its CDS, since a default makes the US bank a net winner, not a loser as logic might suggest.

Morgan Stanley, for its part, refuses to comment on this speculation (although its officials note that the bank does not generally take active “short” positions in its clients.) And I personally have no way of knowing whether Morgan is short or long, since Morgan refuses to disclose details of its CDS holding.

What is crystal clear is that somebody has been placing big bets on whether or not the banking equivalent of Borat will blow up. Right now more than $700m BTA CDS contracts are registered with the Depositary Trust & Clearing Corp in New York. Last year the BTA CDS contract was so liquid that banks and hedge funds were trading it as a proxy for Kazakh governent debt.

Therein lies the crucial reason why the world outside Kazakhstan should note what has happened to BTA. In some respects, the fact that BTA has spawned so much CDS activity has been rather good for Kazakhstan. After all, if banks such as Morgan Stanley had not been able to hedge their positions in recent years, they might never have provided finance on such a scale to BTA - or any other emerging market banks.

Or, to put it another way, if CDS contracts did not exist, Western banks such as Morgan Stanley would now be nursing big losses at BTA, rather than ending up flat (or even making a profit.)
But the rub for regulators and investors is that BTA credit risk has not entirely disappeared: somebody right now is holding the other side of Morgan Stanley’s contracts and unfortunately there is little way for outsiders to know exactly who.

Worse, the presence of those CDS contracts makes it fiendishly hard to work out what the true incentives of any creditors are. In theory, lenders should have an interest in avoiding default. In practice, CDS players do not. The credit world has become a hall of mirrors, where nothing is necessarily as it seems.

At best, this makes it very difficult to tell how corporate defaults will affect banks; at worst, it creates the risk of needless value destruction as creditors tip companies into default. Either way, the key point to grasp is that this is not just a Kazakh tale.

After all, investment banks and hedge funds have written vast volumes of CDS contracts on western names too. And while the corporate default rate has been low in recent years, it is rising fast.

What is playing out at BTA, in other words, is merely a foretaste of what awaits part of the Western corporate scene too. Call it, if you like, the new face of financial globalisation, albeit one that is unlikely to look quite as funny as those Borat jokes, as companies and investors finally wake up to the implications of this deceptive new credit world.

By Gillian Tett
Published: April 30 2009 18:11
Last updated: April 30 2009 18:11
The Financial Times Limited 2009

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