Gold's fortunes still
ride on policy of
European banks
Neil Behrmann
LONDON - Gold priced in euros is at about 247 euros
($291,20), only five euros above its two-year low of
242 euros last Monday. The big question is whether
European central banks will continue to sell or trade their
gold.
The good news, said Andy Smith of Japanese trading
firm Mitsui Bussan, was that there had been no European
central bank sales since Belgium sold 299 tons in the first
quarter of last year. The bad news was that gold still
behaved poorly even though there had not been pressure
from central banks.
According to the January 1 consolidated statement of the
11 European central banks and European Central Bank
(ECB) Eurosystem, gold represents 99,6-billion euros
($117bn) or 14% of all the banks total assets. This was
equivalent to about 12450 tons, Smith said.
The ECB's own gold and foreign exchange reserves
amounted to 39,5-billion euros and the gold proportion
was 15% worth 750 tons, he estimated. Official gold
figures are unavailable, but estimates tally with the
currency value of the metal at the beginning of the year.
The ECB and 11 central banks are not prepared to
disclose their gold trading policies, but dealers said
central banks were continuing to lend their gold to obtain
interest.
Bullish analysts such as Rhona O'Connell, the metals
analyst of T Hoare & Co, believe that European central
banks will not sell because the gold proportion of all
central banks in the euro zone is the same as the ECB.
The World Gold Council also maintains the 15% holding
of the ECB's reserves "is a testament to the importance
of the yellow metal as a reserve asset". Regardless of the
proportion, the 11 central banks still control about
11700 tons of gold and will examine its prospects.
As Smith points out, the most significant change to the
euro monetary system is that gold is valued at market
values. This contrasts with the previous conservative gold
valuations pursued by European central banks.
Since the member governments of the euro-zone are
social democrats, spending is likely to increase while tax
receipts from weaker economies are likely to be lower.
The result will be a more aggressive management of
central bank gold reserves.
Much will depend on price perceptions. Bulls maintain
the depressed euro gold price is a disincentive for central
bank selling while others believe it illustrates gold is a
nonperforming asset. Although the dollar price of gold is
likely to rise if the US currency falls, gold in euros could
continue to slide.
On the other hand if gold appreciates with the dollar,
euro zone central-bank treasurers might be reluctant to
sell.
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