LONDON: Monday 7 May 1999
- UK Treasury Gold Sales
The UK Treasury's intention of selling 415 tonnes of its gold reserves
over what it calls the "medium term," thereby reducing its holdings
to 300 tonnes (from 715 tonnes) has had an immediately damaging effect
on the gold price, which fell by nearly $7.50 to $281.50 an ounce in
early trading in London.
The UK Treasury's current holding of 715 tonnes of gold represents 16.7
per cent of the UK's official reserves. By selling an initial 125 tonnes
- in five tranches in the current financial year - this proportion drops
to 14 per cent, below the international average of 16 per cent. The total
sale of 415 tonnes will bring UK official gold reserves down to about
7 per cent.
The official line of the Bank of England, which will manage the gold
auctions, is that this planned sale is no more than "a prudent restructuring
of reserve holdings." However, it acknowledges that this is a political
decision by the Treasury. Some commentators have already suggested that
this move is a precursor to the UK joining the European Monetary Union
and the European Central Bank. If Britain becomes part of the ECB its
gold or foreign currency reserves will effectively be frozen as, under
ECB guidelines, any gold sales by individual central banks will be subject
to control by the ECB. Thus in some sense this move appears to be pre-empting
the promised referendum for UK citizens about whether or not they wish
to join the Euro.
While the Treasury should be applauded for giving a detailed explanation
of its intentions - and thus has done much to eliminate the scope for
rumour-mongering - it is nevertheless inevitable that this will be interpreted
by the international bullion market as further evidence of official disenchantment
with gold as a reserve asset.
The announcement by the Treasury appears to be timed to get in early,
before other planned official sales take place. The Swiss National Bank
is in the process of a lengthy legislative procedure which might enable
it to sell 1,300 of its 2,590 tonnes of reserves, while the IMF is in
the middle of protracted discussions to sell as much as 311 tonnes of
its own reserves. The irony is that Gordon Brown, the UK's Chancellor
of the Exchequer, is simultaneously leading the charge on behalf of IMF
gold sales - purportedly to assist debt relief in poor countries - while
damaging the price by proposing to sell some of the UK's reserves in advance.
The damaging reverberations of such a symbolically-charged action by
the Treasury will be felt for many months to come, not only in the UK
but in a number of the 41 so-called Heavily Indebted Poor countries in
Africa and elsewhere. In 9 of the HIPC countries gold accounts for 5%-37%
of exports; another 5 of them have important gold-mining developments
underway. With each $1 drop in the price of an ounce of gold, these developing
countries will suffer real economic damage. The drop in the price of gold
on Friday as a result of the UK Treasury's announcement immediately wiped
off $150 million from the annual export earnings of Sub-Saharan Africa.
The volume and timing of the planned sales - an initial 125 tonnes in
five auctions in the financial year 1999/2000, starting on 6 July 1999,
with the rest spread out over an undefined "medium term" - may be manageable.
Indeed, annual global demand for gold is currently running about 1,000
tonnes over mine production. Net annual sales from the official sector
have been averaging 315 tonnes over the past decade. The sale of 125 tonnes
by the UK over two years needs to be seen in perspective, particularly
in the context of there being no major official sector gold sales announced
that took place in 1998 or in the first half of this year.
The decision to sell gold and hold official UK reserves overwhelmingly
in foreign currencies betrays a failure to consider the reasons why gold
has always been considered an important defensive asset in the long term.
* The UK had 1,432 tonnes of gold in 1948. Between 1958-65 it fluctuated
between 2,000-2,500 tonnes. The last time the Treasury sold any gold from
its reserves was during 1966-72 when 1,356 tonnes were sold. Reserves
were boosted again in the late 1970s and have remained stable at about
715 tonnes since then.
- Ends -
Contacts:
Haruko Fukuda, chief executive of the WGC: +44 171 930 5171
Gary Mead, head of research of the WGC: +44 171 930 5171
George Milling-Stanley of the WGC New York: +1 212 317 3848 |