FOCUS-ECB may hold 10-20 pct reserves in gold
NEW YORK, May 11 (Reuters) - The European Central Bank (ECB) currently being established may hold 10 to 20 percent of its reserves in gold, and further European central bank sales of gold are unlikely this year, according to Terry Smeeton, the recently retired head of the Bank of England's foreign exchange department.
''I think it is clear that the ECB will definitely hold gold in its reserves, and it is now likely that 10 to 20 percent of those reserves will be held in gold,'' Smeeton told the Goldman Sach's Commodities Conference in New York Monday.
''Anything less than 10 percent would probably be bearish for the gold price, while anything more than 20 percent would probably be bullish, but I think it will fall somewhere in that range,'' he said.
The ECB is due to make a decision on the composition of its reserves sometime this summer. Under the Maastricht Treaty, the ECB will hold total reserves of about 50 billion euros (about $55 billion) which will most likely be made up of gold, dollars and yen.
''The amount of 50 billion euros was set when it was thought there may be 15 members of European Monetary Union (EMU), but Brussels this month confirmed only 11 European countries as participants, and that may result in a reduction in reserves held to about 40 billion euros, and this may impact on the proportion of gold held,'' Smeeton said.
There are arguments both for and against holding a significant quantity of gold in ECB reserves, Smeeton said.
''Politically, the ECB needs to look like a conventional European central bank and the central banks of France, Germany and Italy hold significant quantities of gold in their reserves, though other European central banks hold much smaller proportions,'' he noted.
Germany's Bundesbank holds about 3,700 tonnes of gold in reserves, about 37 percent of its reserves at December 1996, while the Bank of France holds about 3,182 tonnes, about 62 percent of reserves at that date.
''One factor weighing in favor of a 20 percent figure is that one study showed that, from a reserves management point of view, in a portfolio of gold, dollars and yen, a 20 percent gold component would have produced the least volatility and risk over the past 20 years,'' Smeeton said.
Asked if the ECB gold holding could become a model for other central banks, Smeeton said, ''The establishment of the ECB is the first time a central bank has been set up from scratch, and as a result it's possible it could become a model for other central banks, which may have implications for the amount of gold other central banks, such as those in Asia, hold.''
European central banks currently hold about 13,000 tonnes of gold, about 38 percent of all world central bank gold holdings, but if about 20 percent of that was pooled in ECB reserves, it would still leave about 11,000 tonnes of gold in the hands of European central banks, analysts noted.
''ECB approval is going to be needed to allow individual European central banks to sell any more of their gold from after January 1, 1999, but even before then I think it is improbable that we will see any more European central bank gold sales this year, because of the risks to the EMU (European Monetary Union) this would entail,'' Smeeton said.
''However, the gold market's preoccupation with EMU is likely to continue, because the focus of European central banks is likely to remain on reserve management and that is likely to mean more gold lending by European central banks,'' he said.
Germany's Bundesbank and the Swiss National Bank have both confirmed they have entered the gold lending market in the past year.
''Gold leasing with a maturity of about six months currently can earn around 1.0 to 1.5 percent, which is more than the returns available on Japanese yen deposits, so more European central banks may begin lending,'' Smeeton said.
Smeeton told Reuters in a separate interview that he believed the size of the total world central bank gold lease book was currently around 4,000 tonnes.
''I've raised my estimate a little and I'm aware that some analysts believe the gold lease market could be much larger, but based on surveys we did I think it's probably about 4,000 tonnes,'' Smeeton said.
Analysts estimates of the size of the gold lease market range from 3,000-10,000 tonnes.
Gold is leased to finance gold mining companies hedge books, to fund fabricator inventories and sometimes gold is borrowed as a currency with a low interest rates to fund bullion bank operations, analysts said. |
