- Global Watch
Sell gold or use it as
a Monetary Asset?
Gold Forecaster snippet
Jun 14, 2007
- Below is a snippet from the
latest weekly issue from www.GoldForecaster.com
Spain's sales of gold
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
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
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.
Please subscribe to www.GoldForecaster.com
for the entire report.
Jun 13, 2007