ANALYSIS-UK gold sale is no policy aberration
12:22 p.m. Jul 09, 1999 Eastern
By Patrick Chalmers
LONDON, July 9 (Reuters) - Britain's plan to sell more than half its gold reserves is no policy aberration but the product of sound finance, and withering criticism may only make things worse for gold prices, economists and analysts said on Friday.
Changing central bank policies worldwide reflect pressures to generate returns from national reserves, favouring foreign-currency holdings over low-yielding gold, they said.
''I would say this is a natural progression in central bank policy,'' said Roger Alford, senior research associate in the financial markets group at the London School of Economics.
''This represents the growing influence of economists in the Bank of England and indeed at the International Monetary Fund and elsewhere. They tend to look at the rates of return on assets and to ask whether asset allocation is right or not.''
Gold's fall to fresh 20-year lows this week, after Britain held its first 25-tonne auction, showed its fallibility as a reserve asset. The Bank of England plans to sell 415 tonnes over the next couple of years and put the money into dollars, euros and yen.
''If you really are in trouble and you need to sell gold is the market going to absorb it at the current price? I think not,'' said Alford, who described the amount sold by Britain as ''trivial'' in the context of international money flows.
''If you are a central bank with reserves in dollars, euros and yen at least you have a variety of markets rather than just a single gold market in which to trade,'' he added.
Forrest Capie, professor of economic history at London's City University Business School, said taxpayers had been short-changed by central banks with high gold weightings in reserves.
''You only have to look at the price trend over the last 20 years to see that taxpayers can legitimately ask: 'Is this the best you can do?' It's very difficult to defend holding gold on the scale at which it has been held,'' he said.
Evidence that central bankers are taking greater interest in the worth of their gold includes their tendency in recent years to account for it at or near market prices, rather than leave it at an artificially low book value.
''There's definitely been a tendency to move in the direction of market-related prices,'' said Philip Klapwijk, managing director of industry consultants Gold Fields Mineral Services.
He said Britain's gold sale and the more than 10 percent fall in prices since its plan became public in May had made gold policy a pressing issue among the 11 countries in Europe's single currency bloc, which together hold 12,574 tonnes of gold.
''The UK was not considered a natural seller. People did not expect them to step up to the plate and start selling 415 tonnes of gold reserves. I do think it's concentrated the minds of a lot of other central banks.
''There was this idea that gold would be put onto the back burner in Europe but I think that's unrealistic now,'' he said.
Anti-sales protests by gold miners and producer countries such as South Africa, which faces devastating job losses and economic hardship if low prices force shaft closures, could perversely do more harm than good.
One London analyst, who asked not to be named, pointed to the danger of preventing the International Monetary Fund's planned sale of up to 311 tonnes from its holdings of 3,217 tonnes.
The IMF proposal, intended to help fund debt relief for poor countries, has been attacked by U.S. congressmen who have threatened to block it.
''If the IMF sale does not go ahead with the sales it will probably be the worst day in gold's history,'' the analyst said.
''If they can't use it they will give it back to members, and what will all those countries do with it?'' he asked. Fund members included countries which had sold substantial amounts of reserve gold in the past, and which would probably do so again.
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Copyright 1999 Reuters Limited.
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