Hello Bobby: How are ya today? I have attached some info for readers
that might have some questions as to gold's place in the economic picture of today. Points of veiw and opinions might be veiwed as bias, but what the hell who's opinions aren't. It is good reading from the WGC. Just another source of info as far as I am concerned. Varying opinions is what it is all about . Your commentaries and guidance to various sites and articles have been enlighting and informative.Thank you much. Good Dayyyyyyy Ronald
PS: IMHO gold will not perform until there is a flight out of the US market and the US dollar shows signs of weakening. Presently it appears that the US Market is the last safe haven for investors. What happens when there is no other vialble alternatives for Investors. The Dow appears to be over-priced. But what is my expertise in this area. NONE!!Just giving an opinion from a Novice. Japan on the verge of depression. Russia is a basket case. Asia on the verge of self destructing. China considering devaluating their currency. Although they will resist.Tensions in Pakistan and India ,Building to a fever pitch. New Eruo $$$$ coming on the financial stage. Interest rates caught in a Catch 22. To defend the dollars of all these countries, which would only cause more chaos...etc etc.....
Issue No. 23
May 1998
Web Edition
Special Feature
Frequently Asked Questions
The role of gold as a reserve asset has been a frequently debated issue in recent years. While some economists argue that gold no longer has a major role to play in this context, others differ. In practice the role of gold in international reserves is a misunderstood issue with many people - even experts - being unsure of the facts. Some of the questions that are frequently put to WGC staff on the topic follow.
QUESTION: Is there still a role for gold as a reserve asset ?
ANSWER: Certainly. 70% of countries reporting to the IMF declare some holdings of gold and only 6% say they do not hold gold (the remainder not declaring either way). None of these countries hold gold simply out of sentiment or for historical reasons. The world's central banks and monetary institutions still hold 34,000 tonnes, or 25% of all above-ground stocks.
QUESTION:We do not have the gold standard any more, so why is gold appropriate as a reserve asset ?
ANSWER: For a number of reasons. First gold, unlike any currency-based asset, is no one's liability. It is not directly influenced by the economic policies of any individual country. It can not be repudiated or frozen. Second, holding a proportion of reserves as gold can help to minimise risk. Studies show that returns on gold tend to be negatively correlated with returns on other assets typically used in reserves thus making gold an ideal "diversifier". Third, gold reserves help to build public confidence in a country's currency. Fourth, over the very long-term gold has a history of maintaining its real price. More details of the arguments for a country holding part of its reserves in the form of gold are shown in the WGC policy document Why should central banks hold gold?
QUESTION: Unlike currency holdings, for example US Treasury Bills, gold does not earn interest; so aren't central banks effectively losing money if they hold gold rather than, say, dollars?
ANSWER: It is not true that gold does not earn interest. Gold can now be leased by central banks to generate around 2% interest - more than can currently be earned on Japanese government bonds. Around 70 central banks are thought to participate in the leasing market and the number is growing.
QUESTION: 2% may be better than nothing but it is less than I can earn on US Treasury Bills - and the dollar hardly looks like a risky currency to me. Why not just hold dollars?
ANSWER: Of course any country will wish to hold a large proportion of its reserves in the form of dollar securities. It is, after all, the world's main reserve and intervention currency. Further, at the moment the US is enjoying a benign period of economic growth and confidence in the dollar is deservedly high. But, remember, only 20 years ago in the 1970s this was not the case. Good times do not last for ever. The Asian crisis reminds us how quickly confidence can be lost in countries which were only recently considered examples of outstanding economic success.
Furthermore, the gold price can go up as well as down. Research shows that over the last 100 years if you had invested a sum of money in any randomly chosen year and sold in any randomly chosen subsequent year you would have been more likely to have had a better return on gold than in US Treasury Bills, albeit with the possibility of a more volatile return.
QUESTIONn: But central banks are selling all their gold, aren't they ?
ANSWER: Although there have been a number of well publicised sales in recent years, it is worth noting that, in 1997, more individual central banks bought gold than sold it, even though in volume terms sales were a net negative. In 1997 central banks sold an estimated net 393 tonnes, a mere 1% of total official holdings. Although higher than the year before, the figure is less than the net amount sold in 1992 and 1993. Total official gold holdings have fallen by only 5% in the last ten years.
QUESTION: Nevertheless central bank sales have exceeded purchases in recent years. Doesn't this mean that central banks are losing confidence in gold ?
ANSWER: A small number of central banks may feel that they should hold only small amounts of gold in the future. But many others, including some of the largest holders, have repeatedly said that they have no plans to sell, while some are buying. As in many areas of life there is room for different points of view.
Some of the most significant sales in recent years have been for special reasons. Thus Belgium has sold gold in order to use the (considerable) profits from the sale to reduce its outstanding government debt. Switzerland plans to use some of its gold to finance its proposed Solidarity Fund (assuming, which is not certain, that this proposition is approved both by individual cantons and in a referendum). Gold, after all, is there to be used when necessary.
QUESTION:The gold price has fallen in recent years. Isn't this a good reason for central banks to stop wishing to hold gold ?
ANSWER: No. It may be true that the gold price has fallen in recent years but a longer look shows a very different picture. Remember that up until 1968 the gold price was fixed at $35 per oz. Its current price of around $300 per oz is a gain in real terms. Some of those banks that have sold have made substantial profits For example, when the National Bank of Belgium sold 299 tonnes of gold in late 1997/early 1998 the proceeds from the sale were 110bn Belgian francs - of this 92bn francs were profit. Many studies show that, while the gold price moves up and down in the short-term, over the long-term the value of gold in real terms has remained remarkably stable.
QUESTION: Will central banks of EMU members sell their gold once European Economic and Monetary Union starts ?
ANSWER: After European Monetary Union (EMU) starts on 1 January 1999, member countries (likely to include the largest gold holders such as France, Germany and Italy) will be bound by the Articles of the European Central Bank (ECB). One stipulation is that transactions in reserves remaining with the national central banks, after an initial amount has been transferred to the ECB, must accord with policies set down by the ECB. National central banks will certainly not have carte blanche to do whatever they like with their gold. The reserves structure of the future European Sysytem of Central Banks is a complex issue. More details are shown in Why the European Central Bank should hold Gold.
QUESTION: But won't the ECB itself be indifferent / negative towards gold ?
ANSWER: No.One conclusion of the meeting between gold producers and leading central bankers during the World Economic Forum meeting at Davos in January was that gold would form part of the reserves of the European Central Bank. All future members of EMU currently hold gold in their national reserves, some on a very large scale. They will want to see the new supranational central bank look as much as possible like their own central banks. And the ECB's Governing Council will be composed largely of current national central bank governors.
QUESTION: How much gold should the ECB hold?
ANSWER: This will be for decision by the Bank's Governing Council sometime in the second half of this year. At present, proportions held by potential members vary from over 40% in France to as little as 1«% in Ireland. The precise amount in the ECB should not matter unduly to the market.
QUESTION: So why should the ECB hold any gold?
ANSWER: Partly for the same reasons as any other central bank will want to hold gold. In addition, as a totally new institution the ECB will be concerned to establish its credibility as quickly as possible. Part of this process will involve modelling itself (looking as much as possible like) currently successful exemplars. The Bundesbank, for example. Such exemplars tend to hold reasonable amounts of gold. The ECB is likely to want to do the same in order to reassure the populations of the individual member countries that it will be behaving in a recognisably prudent manner.
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