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Gold/Mining/Energy : Epic EAS.v (formerly Epic ERB.v and Safari SIR.v)
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To: CLK who wrote (1719)3/29/1998 7:38:00 PM
From: Henry Volquardsen   of 3335
 
Off Topic to CLK

Thanks for your generous comments.

I looked up some specific numbers for European reserves. Current Euroland reserves are between ECU 450 and ECU 500 bio. For Euroland I am using the 11 likely entrants to the Euro plus the non-entrants Sweden, Denmark, Greece and the UK. The numbers are slightly larger than will be in the Euro but the ratios are correct. Upon the creation of the Euro the portion of these reserves that become the Euro will no longer be reserves. The post union reserves will be ECU 406 bln. Gold is @25% of this or ECU 101.5 bln.

The treaty calls for the European Central Bank to have ECU 50 bln in reserves. In the same statements that the central bankers said they would have 30% of reserves in gold they said total Euroland reserves, those held by the European Central Bank and the subsidiary national central banks would be 5 to 6 times that. Using the 6 number that gives total reserves of ECU 300 bln. The first thing that jumps out from this number is that the Euro will be backed by 25% fewer reserves than the preceding currencies. Also 30% of ECU 300 bln is ECU 90 bln. With current Euroland gold reserves at ECU 101.5 bln that implies they may have as much as ECU 10.5 bln in excess Gold. It also implies that they have as much as ECU 95.5 bln in excess currency reserves, largely dollars. Now I am not implying that they are going to sell either of these troves of excess reserves. I believe it is not in their best interest to strengthen the Euro, at least in the early days. The point of these numbers is to show that the comments by European central bankers about up to 1/3 of Euro reserves being in gold does not necessarily imply they will need to buy gold. It also does not imply the Euro will have significant gold backing or is setting up a gold trap for the dollar. The Italians are the third largest holders of gold in Europe and are trying to assuage German public opinion. I believe Fazio's comments were motivated by those two factors.

Henry
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