Archived World Gold Council Document

Dialogue between Gold Producers and Central Bankers

During the meetings of the World Economic Forum at Davos, Switzerland, from January 28-February 1, gold producers engaged leading central bankers in a high-level dialogue on the role of gold as a reserve asset. One of these meetings was a private session attended by Thabo Mbeki, Executive Deputy President of South Africa. There were two further gold-related sessions on the official programme: first, a working dinner, chaired by Bobby Godsell, Chairman of Anglogold; secondly, a panel discussion on the question: "Central banks: What Future Challenges?". Speakers included Andrew Crockett, General Manager of the Bank for International Settlements, James Cross, Deputy Governor of the South African Reserve Bank, Peter Munk, Chairman of Barrick Gold, and Jean-Claude Trichet, Governor of the Banque de France.

Council Role

During the course of 1997, Council management worked with WEF officials to bring gold onto the 1998 meeting agenda, to devise the programme and to attract speakers and participants to the various sessions. Robert Pringle, Head of the Council’s Public Policy Centre, participated closely in all aspects of the programme and its preparation, and spoke on behalf of gold producers at the private session with leading central bankers.

Producer Concerns Outlined

At these sessions, and particularly in the private session (where attendance was confined almost exclusively to Chairmen and CEOs of gold mining companies and leading central bankers), the producers expressed their concerns at the way in which lack of clarity about central bank policies and intentions had led to unjustified fears of large-scale and continuing gold sales, opening the door to speculative activity that further depressed the price.

Gold producers, like central bankers, were interested in gold from a long-term perspective. Yet at the moment the market was largely dominated by the actions of short-term speculators which carried prices far away from underlying market fundamentals.

Key Points

The main points to emerge from the series of meetings were as follows:

• The French and German central banks made clear that they would not be selling any gold. The Swiss may sell a limited amount of gold, to help finance the Solidarity Fund, though this requires approval by the population in referenda not only at the Federal level but in each canton.

• In leading EU countries, notably France, Germany and Italy, gold is seen as supporting the credibility of the currency. Switzerland shares the pro-gold atmosphere and culture of its larger neighbours.

• All the gold reserves of the member states participating in European Monetary Union will form part of the external reserves of the euro, Europe’s new currency scheduled to be launched next year. The ECB will issue guidelines (possibly secret) on the management of that part left with national central banks.

• The new European Central Bank (ECB) will inherit the traditional attitudes of its constituent countries towards gold and their view that gold supports the credibility of the currency. Thus gold would form part of the reserves of the ECB.

• Central bankers pointed out that the reduction in inflation had meant that gold had lost much of its attraction as a hedge against inflation. Also, there was pressure from governments to increase the rate of return on external reserves. However, gold producers made clear they were not asking for any protection from normal market fluctuations - and certainly did not seek a return to high inflation. They sought merely an end to damaging uncertainty.

Greater Central Bank Understanding

As a direct result of the interchange, both formal and informal, in Davos, the leading central bankers of Europe do now understand more about gold and the implications of their policies and statements, not only for gold producers and the market, but also for the economies of countries that have significant gold mining sectors. They were impressed by the participation of Mr Mbeki and the eloquent plea he made on behalf of the whole of southern Africa and other developing countries.

This can only help to improve market sentiment. As the Executive Deputy President of South Africa stated afterwards:

"I believe the meeting will produce conditions which militate against the speculative selling of gold" (Financial Times).

Mr Mbeki added that he had not expected explicit promises from the central bankers, and he did not get them. "But I think they understood and I can only hope they respond".

Mr Godsell commented afterwards that the meetings had been "the most intense and specific exchange in recent history" between producers and central banks:

"Everything we heard was fundamentally encouraging, and the producers’ voices were heard."

Ongoing Contacts

The Council continues actively to pursue further contacts with central banks and other official holders. WGC staff members have recently visited the Bank for International Settlements (BIS), which manages gold holdings on behalf of several central banks (as well as having some gold of its own), and the European Monetary Institute (EMI). The EMI is the precursor of the European central Bank to be formed later this year.