On January 27th, 2023, the IMF released a working paper titled, Gold as International Reserves: A Barbarous Relic No More? It was released with the hope of understanding why central bank gold purchases in 2022 rose to a high since 1967. However, before diving into the paper itself, it is vitally important we have a foundational understanding of the relationship the IMF has with the shiny yellow metal.
Prior to the Second Amendment of Agreements being put out by the IMF in 1978 (essentially the agreement all members of the IMF must agree to in order to stay as an eligible member) gold was actively used by the IMF, but it was used in a way to enrich themselves. In 1944 the IMF created what is known as SDRs or Special Drawing Rights and announced it would have equal value to 0.888671 grams of fine gold. Essentially, they printed paper out of thin air, said it was as good as gold, and proceeded to send it to countries in exchange for gold. All the while, the official definition of the SDR from the IMF’s website reads as follows: “The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members.” so when considering that 25% of all the gold held at the IMF came from members paying their membership quotas in gold, as well as repaying extended credit by the IMF in gold. Essentially, the IMF would bail a country out with SDRs they created out of thin air, that only may POTENTIALLY be used as a claim against another currency, and then when it was time to pay back the interest on the loan, it had to be done in gold, not SDRs. This scheme pulled by the IMF has allowed them to accumulate 2565 tonnes of gold – which means if the IMF were a country, they would be the 3rd largest gold holder in the world behind the United States and Germany.
After the IMF had secured a massive holding of gold through their member countries, the aforementioned Second Amendment of Agreements in 1978 removed the fixed price of gold the IMF’s SDR was “backed by”. Backed being in quotations because even though they said it had value in relation to gold, you could never exchange IMF SDRs for gold from the IMF. It was a one-way street that only allowed the IMF to use the SDR as a loan, receiving gold in return, so the shiny metal flowed into their vaults and out of other countries. What the removal of the fixed SDR/gold price then did was send gold skyward in price, hugely enriching the IMF. In January of 1978 gold was $173.35 per ounce. After the announcement the IMF would not seek a fixed price in gold in relation to their SDR, gold rocketed to $674.84 per ounce by 1980. That represents a 289.29% increase in price, with majority of those gains flowing to the IMF because they had previously absorbed massive amounts of the world’s gold reserve. Since that point, the IMF has taken strong positions against gold, actively working to make their SDR the next global reserve currency. Which, ultimately, is why the paper they released is so intriguing. They are once again acknowledging gold’s role in the monetary system.
What initially sparked this paper to be written by the IMF was in large part due to the chart below…
A complete ‘V’ pattern has been completed by central banks since the Great Financial Crisis of 2008. Prior, banks were steady sellers of gold, since that point, they have increased their holdings of gold by 23.53%. Below also highlights the sheer number of central banks contributing to this massive rise in gold reserves:
In 2008, you had exactly the same amount of sellers as buyers, and since that point, buyers have FAR out paced sellers. Countries and their central banks are making a mad dash toward gold.
What the IMF also uncovered in this paper was that they were able to identify 14 countries that had increased their gold reserves by over 5% the past two decades since the dash for gold began. Russia and China led the way with 60.7 million ounces purchased by Russia and 49.9 million ounces purchased by China since 1999. While not all of that gold went into their reserves, it is still a huge amount of gold flowing through those two countries. What was also interesting was of the 14 countries, 100% were emerging or developing markets looking to increase their slice of the world economy pie, and they are using gold to do it. A large reason being the threat of financial sanctions being placed on countries by who the IMF refer to as the “Big Four” – U.S, UK, Japan, Eurozone. They stated, “Emerging markets increase the share of reserves held in gold in response to sanctions risk. Many of the largest year-on-year increases in individual central banks’ gold holdings occur at times when central banks think that they may be subject to financial sanctions… They view gold as a hedge against economic and geopolitical risks: gold shares in advanced countries and emerging markets are increasing with a measure of economic uncertainty, and those in advanced economies increase in addition with a measure of geopolitical risk.” And to that, below is a chart the outlines both economic uncertainty, as well as geopolitical risk:
At no point in the last two decades have both economic uncertainty AND geopolitical risk risen together like they have since 2021. Even the 2008 Great Financial Crisis barely registers compared to today. Only 9/11 in 2001 and the invasion of Iraq in 2003 caused larger spikes than what we see today in terms of geopolitical risk. It appears we are headed toward the perfect financial storm, and the IMF knows it.
It is becoming vitally clear that countries see gold as the best asset to protect against uncertainty, and as the chart above shows, we are entering unprecedented times when it comes to the risks we face as a world; increasing the attractiveness of gold from every corner of the earth. It is imperative for individuals to start looking at themselves as a small country, and work to become financially sovereign, so the same monetary weaponization used between countries via sanctioning, can never be done to you as a free individual. If you wish to secure more of the wealth you rightfully earned in an asset that has stood the test of time, check out our 1 Ounce Gold TD Bar by clicking here.