Claude:
an interesting article giving the opposing view.
afr.com.au
Silvery moon as golden era ends
By Stephen Wyatt
Gold is in trouble. Britain last week sold off just 25 tonnes of its
reserves, but the gold price crashed to its lowest level in 20
years. Clearly, bigger forces are at work here than the British
sale.
The story behind the collapse in gold is big. It reflects the
profound changes in the economic architecture of the global
economy. Gold, as it always has been, is the barometer of
change.
Globalisation, the free floating of the world's major currencies,
European monetary union, deflation as a result of higher levels
of competition and the introduction of a range of financial
derivatives have all played their part in undermining gold's
financial status.
This sea-change in the global economy is the force driving the
gold market lower.
After more than 250 years as the central pillar of international
trade and as the primary reserve asset of central banks
worldwide, gold is now being marginalised, demonetised and
"commoditised".
Not that this is the first time that a primary store of value has
been stripped of its financial status and converted into a
commodity. Ironically, a century ago the same fate befell silver.
Silver lost 65 per cent of its value between 1871 and 1900 as it
lost its place in the financial system.
In 1871, 80 per cent of the world's population used currencies
that were redeemable in silver and another 15 per cent had a
bi-metallic choice; currencies redeemable in either gold or silver.
"Within a decade or so, the monetary world as 95 per cent of the
people knew it was obliterated," said Mr Andy Smith, precious
metals analyst with Mitsui Busan Commodities in London.
Central banks were then scrambling out of silver into gold
Germany in 1871, the US in 1873, the Latin Union in 1874.
Now central banks are moving out of gold into currencies.
"The writing on the wall for silver's official fate then was just as
clear as it is for gold's now," Mr Smith said.
"The signposts of gold's demonetisation could not be brighter if
they were sprayed in luminous paint," he said.
He pointed to the removal of the gold backing of the US dollar in
1971, removal of the obligation to accept gold payment among
IMF members in 1978, dilution of the gold backing for the Swiss
franc in 1998, gold sales by a host of central banks, including the
Bank of England, and forthcoming sales by the conservative
Swiss National Bank and the IMF.
Yet still there remains a vociferous pro-gold lobby. Groups like
GATA the Gold Anti-Trust Action Group and the World Gold
Council, a body funded by gold producers worldwide, oppose
the demonetisation arguments of Smith and a number of other
analysts, like Ted Arnold, metals analyst at Prudential Securities
in London, and Bill O'Neill, futures strategist with Merrill Lynch
in New York.
GATA, a US-based body, believes gold is intentionally being
depressed by central banks to support the hefty short positions
of hedge funds and investment banks.
The World Gold Council argues that central banks are not acting
according to the wishes of the public.
Interestingly, similar arguments were posed during the
demontisation of silver. Back in 1888 a royal commission said
that "a great mistake has been made by modern legislators who
have forced gold upon the people".
The demise of silver resulted from an explosion in silver mine
output from 1870 and a collapse in Indian silver demand. As its
scarcity decreased so did its value and its monetary role.
In contrast, gold's demonetisation has not been caused by
excess annual supplies. In fact, there is an annual gold supply
deficit (gold fabrication demand less annual mine supply) of
around 1,000 tonnes.
Instead, gold's demonetisation is a reflection of changes in the
global economy. These changes, by marginalising gold as a
safety haven asset for investors in times of financial insecurity
and marginalising gold as a reserve asset for central banks,
suddenly focused the market on the massive holdings of gold in
central bank vaults.
This gold stock overhang became the gold market's burden.
Today, central banks and international bodies hold about 34,000
tonnes of gold, about 10 years worth of world annual mine
supply.
However, no analysts suggest that central banks are going to
liquidate all their gold. Instead it is the uncertainty of when the
next central bank gold sale will occur and how large this may be
that is impacting on price. It is the fear of future gold sales rather
than the sales themselves that is driving the gold market lower.
And again, this is reflected in the history of the demonetisation
of silver. German silver sales in the 1870s, at about 25 per cent of
silver mine output, were not disproportionate to the Belgium and
Netherland gold sales in the 1990s.
Yet silver prices back in the 1870s and gold prices today both fell
sharply.
The 1888 royal commission into silver said that "the mere fact of
the sale and demonetisation ... would probably tend to discredit
silver and produce an effect upon the market disproportionate to
the amount which was actually sold".
This great damage to the silver market psyche in 1888 was
replicated in the gold market last week when the Bank of England
sold the first 25 tonnes of its total 415 tonne gold sale.
Not a lot of gold but it did enough psychological damage that
gold slumped to 20-year lows.
And gold is not going to get a quick dose of lithium to cure its
depression.
The gold market is now waiting for more Bank of England gold
auctions, for the conservative Swiss National Bank to begin its
liquidation of half of Switzerland's gold reserves and for the
possible IMF gold sale of 300 tonnes.
© This material is subject to copyright and any unauthorised use,
copying or mirroring is prohibited.
[Advertising]
[About the AFR]
[Executive Jobs]
[Fairfax]
[Letters]
[Subscription]
|
