Archived World Gold Council Document

1. The Reserve Bank of Australia said it wanted to avoid disturbing the market, but in fact the announcement has greatly disturbed the market as shown in the sharp drop in the gold price. The central bank did not expect this because they thought they could present this decision as being in line with similar decisions by other central banks (The Netherlands, Belgium, Canada etc.) as well as proposed Swiss and German moves, whereas in fact the Australian decision is quite different. Australia is the first central bank to acknowledge that they are selling gold primarily for rate of return reasons. That is why it has been taken so badly by the market.
   
2. The Australian decision has been motivated by narrow financial considerations, whereas in fact it will have wider economic and political implications. These wider implications were not taken into account in the cost benefit analysis which they carried out before taking the decision to sell. For the sake of increasing the return on their international reserves by a few percentage points, the Australian authorities are endangering key sectors of the Australian economy.
   
3. The reserve bank is taking an essentially short-term view of the outlook for gold, whereas central banks are supposed to take the long-term view and to safeguard the currency and the nation against long-term dangers. They are supposed to look after the interests of future generations. However, this decision does fit in with the current management style of the Australian Central Bank which is perceived by other central banks as adopting a risky and aggressive trading style in the management of its currency reserves.
   
4. This action will increase the vulnerability of Australia to external financial and political pressure. This is because assets which are denominated in foreign currencies are subject to threats of being frozen or blocked by the issuing country whereas gold reserves, if appropriately located, are not vulnerable to such actions.
   
5. The Australians themselves accept the key arguments for gold: i) that it is a way of diversifying foreign reserves; ii) that is relatively immune from external political pressures . Their argument is that because Australia has large reserves in the ground they do not need to hold significant reserves above ground. This argument is erroneous for a large number of reasons - the gold is hard to get at, it is owned by private sector companies, and would doubtless command a very high price if the Australian government wanted to mobilise it quickly.
   
6. To put this all in perspective, some central banks have continued to acquire gold. GFMS statistics show that 19 countries were net buyers of gold in 1996 compared with 16 countries that were net sellers and also that the amount sold by Australia of 167 tonnes is very small indeed when set against total world demand or supply. New mine supply in 1996 was 2346 tonnes, fabrication demand was 3290 tonnes, mainly jewellery (85%).

Contact: R. Pringle, Head, Centre for Public Policy , World Gold Council, Kings House, 10 Haymarket, London SW1Y 4BP, U.K. Tel. +44.171.930 5171, Fax. +44.171.839.4314, or by e-mail: info@gold.org.