Sell Gold or Use It as a Monetary Asset?


...We have always maintained that gold, in a monetary role, has to be at far higher prices than even the most adventurous of forecasters would pitch...

The Bank of Spain's recent gold sales are part of a strategy to shift its reserves into more profitable fixed-income instruments, Spanish Finance Minister Pedro Solbes said last week. Anyone with a modicum of knowledge of finance gasped at the sheer ignorance of the words.

In a statement that ignores the concept of ‘total returns’, the main market criteria for successful investors, the Minister’s spokesperson quoted him as saying, "What we aim to do is to sell gold, an unprofitable asset, to reinvest in bonds, which are more profitable."

Clearly we all have missed something that he has seen? After all, we consider gold to have achieved a 130% rise in the gold price since 1999 a profit, don’t you?

He then went on to say, “The objective of our reserves is to maximize their profitability," Solbes said. This is from a man so highly qualified that he was given the responsibility of managing Spain’s finances. Methinks he comes from the same stable as Chancellor Brown [sorry, Prime Minister Brown].

The Bank of Spain added to past sales of 80 tonnes with another 28 tonnes of gold sold in May. None of these sales were announced in advance, which is why we include them alongside Belgium in red in our Tables in the Gold Forecaster, the only two Central Banks who are selling without the formal commitment to a limited and described level of sales. So far these sales represent 25% of its total reserves, now sold into the market.

Please note that no mention of the Trade deficit needing covering was made, indeed if we are to accept what the Minister has said there should be no drop in the overall levels of reserves in Spain’s accounts and no selling to cover trade shortfalls. All this unscheduled selling is therefore the result of a planned strategic decision made years ago? This is stretching credibility, surely?

Ah, but then we must note that this was a statement from a Politician, not a money-man. To us as we mentioned last week, this is more likely a dipping into the ‘family Jewels’ to cover debt.

It is reported that, “even during the Bank of England and Bank of Switzerland gold sales period from 1999-2004, no three-month tally during the Washington Agreement days has been as high as 170 tonnes of sales into the market.” The fact that the price has not dropped like a stone is a testament to the underlying strength in the market.

We don’t believe that the statement by Spain’s Finance Minister is any more than a Press posture, a ‘red herring’ for public consumption. It’s callous disregard for the ongoing value of gold in the monetary system as a Reserve Asset ignores the role it could have in the monetary system. The potential of this role is indicated in this [spurious?] article from the Philippines: -

Gold operating as a monetary asset. Not for one moment do we believe the report that, “the Philippine central bank may import gold to remove excess U.S. dollars in the financial system and slow the Peso's appreciation, as reported by a local newspaper, quoting an “unnamed central bank” source. This report also said that the central bank is also looking at possibly selling gold from its reserves to siphon excess liquidity in an effort to decrease inflationary pressure”.

But wouldn’t it be a major step forward to gold being in its old controlling money role?

It is anathema to a Banker to be controlled by gold in that way, but it would ensure a proper management of the printing of money. That sort of control brings accountability with it, which even Central Bankers don’t like and could not live with.

The concept of buying gold to mop up excess $ liquidity is the same as simply exchanging trade surpluses for gold. Just as the Chinese are seeking to use their dollars to the best effect by buying assets with them, so the concept of buying and selling gold [albeit internally] in a similar way, is a movement back to gold as central money. Would it work in a single country in a world swamped with the $, where most trade is still done in the $?

The major obstacle to this policy would be the present low price of gold. Yes, internally in the Philippines it should work, but the sums of money that constitute excess liquidity are huge, even in the Philippines. If this excess liquidity is taken to the gold market, the tonnage of gold it would buy at present prices would drain the market of gold and send the gold price rocketing. We have always maintained that gold, in a monetary role, has to be at far higher prices than even the most adventurous of forecasters would pitch. Hence, our disbelief in this report.

Aah, if only it were true and gold were at several thousand dollars an ounce?

In the next issue of the Gold Forecaster we will look at whether the Central Bank Gold Agreement signatories will or will not sell more than the sales announced to date.

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