A Central Bank Rush to Dump Gold?
"It's all your fault," they tell BOE
Central banks of the world's leading economies have warned the Bank of England that the UK's decision to sell official gold reserves may put them under pressure to do the same.
Central bankers in the G10 group of nations, which include some of the world's biggest gold holders, have told officials of the UK's central bank during talks in Basle, Switzerland, that the sale could cause instability in the gold market.
The banks fear that further falls in the gold price could lead to wider debate about the value of holding gold as an asset, compelling them to review their own reserve policies.
Although gold has long been regarded by central banks as a hedge against inflation and a symbol of monetary stability, growing importance is now attached to increasing the return that reserves earn. A long-term decline in the price of gold has undermined the case for holding large quantities.
Criticism by the world's central banks of the UK sale reflects their unease at the impact of the disposal, which was unusual for being announced in advance and conducted in a series of public auctions. The price of gold has see-sawed wildly in recent weeks, plunging at the end of last month to its lowest level in 20 years.
The banks are concerned that the sale may be significant and lasting because of the leadership role traditionally played by Britain, and the historical links between the Bank of England and the London bullion market. The disposal could create uncertainty about the intentions of other first division gold holders, depressing the gold price more.
The UK, which is to sell more than half its $6.5bn gold reserves in the next few years and replace them with foreign currency assets, is not alone in wanting to reduce its holdings. Switzerland has signalled that it wanted to dispose of 1,300 tonnes of gold after severing the franc's formal link with the metal.
But other nations, including Germany, France, Italy and the US, have so far shown no inclination to sell. "The principal holders of gold would rather not sell and do not want to see the issue raised to the point of public debate," said a central bank official.
The concerns voiced by central banks may heighten speculation about discomfort within the Bank of England itself over the sale. Eddie George, governor, has expressed his support for the move, but is reported to have argued against it.
The UK government yesterday defended its decision to sell. "We have taken advice from the Bank of England on the way forward and we think it is a sensible thing to do," said a Treasury official.
Opposition to gold sales has increased. Under pressure from the US Congress, the International Monetary Fund is reconsidering the planned sale of 10m ounces of gold to fund debt relief.
The Financial Times, August 16, 1999 |
