Asia central banks upping gold reserves
By Sonia Kolesnikov
UPI Business Correspondent
From the Business & Economics Desk
Published 9/13/2002 9:22 AM
SINGAPORE, Sept. 13 (UPI) -- Asian central banks are likely to increase their gold holdings as they reassess their international reserves' overdependence on the U.S. dollar given the current economic environment, a senior official from the World Gold Council said Friday.
"I suspect that Asian central banks are starting to relook at their position in gold, and it would not surprise me if they start buying gold," said Ralston Thiedeman, WGC's director for East Asia.
Central banks around the world hold about 33,000 tons in gold reserves, but Asian central banks only own a fraction of this total. Typically and traditionally, Asian central banks hold between 1 percent and 4 percent of their total reserves in gold, as a ratio. This compared with a 7 percent to 12 percent ratio in the Middle East, a 35 percent to 45 percent ratio among European central banks and 58 percent for the U.S. Federal Reserve.
"We, at the World Gold Council, believe that the Asian central banks hold too little gold," Thiedeman told United Press International on the side of a conference. "We believe there has been an overdependence on the U.S. dollar, and the council has been encouraging Asian central banks to relook at their gold reserves and their ratio, and to have a clear and unambiguous policy on gold."
Thiedeman said many Asian central banks "clearly realize and acknowledge that they have been overreliant and overinvested on the U.S. dollar." Given the current geopolitical risks and economic scenarios, given the size of the U.S. current account deficit (around $450 billion or 4 percent of GDP), the dollar is likely to weaken over the coming months, Thiedeman argued. As gold is negatively correlated to the dollar, it is likely to be a beneficiary of this weaker dollar, he added.
"We have seen 4 or 5 central banks which are now committed to writing a policy on gold, though I'm not at liberty to tell you who they are. But I have been assisting them," he said.
Thiedeman indicated that one central bank, appreciating that U.S. interest rates are at a 40-year low, is looking to reallocate its assets, reducing its exposure to U.S. Treasuries and increase its holding in gold.
In the last couple of years, several Asian central banks have been gold buyers, most notably the Chinese central bank. The Philippines central bank, as well as the central banks from Sri Lanka and Mongolia, have also be seen in the market.
Medium-term, another reason for some Asian central banks to increase their gold reserves could be the use of the gold dinar, as a means to settle international trade amongst Islamic states.
The idea has been championed by Malaysia's Prime Minister Mahathir Mohamad earlier this year, as a way to prevent a repeat of the currency crisis which devastated Asia in 1997-1998. The Malaysian premier argues that while paper currency has no intrinsic value, making the exchange rate "arbitrary and subject to manipulation," the gold dinar has a definite value based on world demand for gold. According to Islamic law, the dinar is a specific weight of gold equivalent to 4.3 grams.
The dinar would not replace national currency and would only be used to settle trade.
"If the gold dinar comes into operation at some point in the future, then the implication would be that the respective Islamic central banks may have to re-evalue their gold holdings, and most likely add to their gold reserves," said Thiedeman.
Speaking at a conference organized by the Institute of Policy Studies here, Thiedeman gave a fairly positive outlook for gold, though he felt short of forecasting any price direction.
Gold traded as high as $850 an ounce in 1980, but over the last 20 years, this price has steadily declined, falling to a low of $252 in 1999. Since then, gold prices have somewhat recovered, as the metal is increasingly seen once again as a safe haven, especially as the U.S. dollar weakens. Gold currently trades around $319 an ounce, still a far cry from its heyday.
"I believe that there will always be a role for gold as long as political and financial crisis exist, so let there be no doubt that gold today is as good as it has ever been, perhaps better," he said.
Copyright © 2002 United Press International
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