Gold and Canada’s FX Reserves (long and only semi on-topic).
I’ll make this post as a sort of “for the record” thing. I don’t particularly want to get into a discussion on the merits of the gold standard. I consider myself an ex “gold bug”, although for short-term considerations I am looking for an entry point on XGD.
You are correct that at one time Canada’s gold reserves were in the range of 22-25 million oz. That was a legacy of the gold standard, as well as a legacy of a government policy to support Canada’s gold mining industry. Most of the reserves were the standard .995, although there was .99995, mostly for minting.
The move to divest gold had one public and one less-public motive. The public explanation was that gold was an unproductive asset – it cost money to store (and protect!), and didn’t bear interest. Selling it for U.S. dollars allowed the government to convert it into an interest-bearing asset. Keep in mind that the price of gold hit approx. C$1000/oz. ca. 1979, and steadily declined thereafter, while interest rates were in the double digits for the next dozen years. So you had an asset that was not only declining in value, but cost you money to hold; and the opportunity cost was 10%+ p.a. interest.
The less-public part of the policy was that liquidating the gold provided a very modest but painless bit of deficit-reduction. Gold was on the books at SDR35/oz., which was usually equivalent to something around U.S.$40. If you could sell the stuff for, say, US$400/oz., you got a gain of US$360, which went straight to reducing the deficit. Marginal in the days when the deficit was running up to $40 billion/yr., but hey, every little bit helped.
Circa 1990, there was a program in place to sell a certain amount each month (IIRC it was usually 50k oz.). In addition, there was a gold loan book, although loan rates were typically a few dozen basis points – it was rare to get over a full percentage point on a contract. Finally, after over a decade of careful study, they initiated a program of selling call options.
I said at the top that I was once a gold bug. That was even before I had a chance to go down to the vault and see $1 billion of the stuff up close and personal. At the time I was aghast that we were selling the stuff at what seemed like cheap prices. During Gulf War I I dragged my feet on sales, saying that we were only “one headline away” from $500 /oz. If memory serves, the actual peak was $417, which happened while I was babysitting an offer of $420. I’m not sure if the dept. of finance still has a contract out on me or not <g>.
In hindsight, the question is, to what price would gold have to go now to render unjustified the divestiture over the last 20 years? If they had sold one million oz. per year over the last 20 years, there would be a pot of something like U.S.$8 billion cash. Further, those sales would have earned close to U.S.$10 billion in interest – and that’s without doing any present value calculation. Properly grossing it up to present value would probably double the figure to $20 billion. OTOH, 22 million oz. of gold today would be worth something just under U.S.$8 billion, less carrying costs in the interim. So the figure of $2k/oz. is probably what you’d need to see before the past policy is discredited. Time, of course will tell. |
