Australian Financial Review July 4/97
RBA's $2bn gold sell-down
By Joanne Gray
The Reserve Bank of Australia has sold two-thirds of its
gold reserves in a move likely to further erode investor
confidence in one of Australia's principal export
commodities.
The sales, worth more than $2 billion, were conducted
discreetly over the past six months, during which time the
gold price has fallen from around $US360 an ounce to
less than $US335/oz. At an average price of around
$US350/oz, the sales have given the bank a book profit
of $2.1 billion.
Last night the Reserve Bank said it had reviewed the
costs and benefits of holding gold, and decided that
"while there was a case to hold some gold as a
contingency against unforeseen events", keeping a fifth of
its international reserves in gold was "no longer justified".
Commenting on the sale, the Treasurer, Mr Peter
Costello, said: "Gold no longer plays a significant role in
the international financial system."The Reserve Bank said
there were "negligible diversification benefits" in holding
such a large gold stockpile, since Australia "has large
gold reserves in the ground".
The sales reduce the Reserve Bank's gold reserves from
247 tonnes to 80 tonnes. The bank said it had no plans
to sell any more of its stockpile.
Australia's gold industry is likely to regard the sales as a
significant blow.
The gold price hit a four-year low this week, falling to
$US332/oz.
Some forecasters believe the slide will continue: Merrill
Lynch predicted this week that the price will fall until it
reaches $US250/oz.
Although the Reserve Bank's sale will have little
immediate effect on producers, it will shake investors'
confidence. That has already been weakened by the fall
in the gold price and gold miners' forecasts of smaller
profits.
Officials stressed that the move was not a comment on
the probable direction of the gold price or its traditional
role as an anti-inflation hedge.
Mr Costello said last night that the RBA had sought his
approval to reinvest the realised gains from the sale rather
than return them as a dividend to the Government.
But such a move would have been "fiscally and
prudentially irresponsible", as it would have been only a
one-off assistance to the Budget, and would have eroded
the official reserve position of the RBA.
This would, he said, have weakened the bank's balance
sheet and its standing in world markets.
Nevertheless, with the sale proceeds invested in
better-yielding assets such as government bonds, the
RBA's annual dividend payment to the Government is
likely to increase by approximately $100 million.
The proceeds of the sales have been invested by the
Reserve in foreign government bonds denominated in US
dollars, Japanese yen and deutschemarks.
Central banks -- in other gold-producing countries
Canada and South Africa, and in Europe -- have been
winding back their gold portfolios over the past few
years.
Dutch and Belgian central banks last year sold 500
tonnes of gold, while Canada's and South Africa's central
banks have also been prominent sellers.
The sales were undertaken forward, with 125 tonnes
being delivered in June and the remainder to be delivered
in August and September.
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