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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: Bucky Katt who wrote (3369)	11/21/1997 3:51:00 PM
From: Greg Ford	Read Replies (3) \| Respond to of 116811

Robert Chote: Loss of lustre FRIDAY NOVEMBER 21 1997 Robert Chote asks whether central banks have lost their faith in gold. Yes, gold, whose nature does not alter . . . and which has no nationality . . . has, eternally and universally, been regarded as the unaltered currency par excellence. Thus Charles de Gaulle. Central bankers, too, have long regarded the yellow metal as the ultimate store of value. In vaults around the world, they hoard a third of all the gold that has ever been mined. But there are signs of a change: for a new generation of central bankers, gold may be losing its mystique. The shift in perception is having a devastating effect on an already depressed gold market. From a peak of $850 a troy ounce in 1980, the gold price dropped to $320 by early 1993. It recovered to $417 by early last year since when it has been all downhill. At the end of last week the price dropped below $300 for the first time in more than 12« years. Central banks are largely to blame for the recent fall. Private sector demand has remained robust but some central banks have been selling gold from their reserves. Others are thought to be on the point of doing so. There is even talk that the European Central Bank could do without gold altogether. Governments and international financial institutions hold about 1.1bn ounces of gold, worth $335bn at market prices. So when central banks appear to lose interest in the metal, investors and producers get nervous. But to what extent are central banks really losing interest? Though gold relinquished its role as the formal anchor of the international monetary system in 1971, it has long been regarded as a means of insuring against inflation, which erodes the value of paper currency. Traditionalists who dispute the notion that "inflation is dead" are unlikely to think gold has passed its sell-by date. As the gold lobby points out, more central banks were buyers last year than sellers, although the amounts were relatively small. During the 1990s gold enthusiasts have shrugged off the sale of 15m ounces by Belgium and 9.6m ounces by the Netherlands as thinly disguised attempts to reduce national debt burdens in readiness for European economic and monetary union. But Australia's announcement in July that it had sold two-thirds of its official holdings came as a big blow. This was the first time a major gold producer had made central-bank sales. More than that, the action was justified on the grounds that the authorities wished to raise the return on their international reserves. Australia's reasoning was simple: why should a central bank maintain gold reserves when it can hold US treasury bills on which it earns interest? To be fair, gold is not necessarily a non-interest bearing asset. More than 60 central banks are now prepared to lend gold to the private sector, typically at interest rates of between 1 and 3 per cent - not bad compared with yen rates. The Bundesbank announced last week that for some time it had been lending part of its 95m ounce gold reserves on the London bullion market. Although it claimed it had "absolutely no intentions of selling gold", purists say a willingness to lend the metal as good as concedes the principle that it could be sold. Significantly, the market doubts the Bundesbank's intentions only months after Germany's central bank torpedoed Bonn's plans to revalue its gold reserves in the run-up to Emu. Part of the explanation is the timing: the announcement came just after a recommendation by government-appointed experts in Switzerland that the country - another paragon of monetary virtue - should sever the formal link between gold and the Swiss franc and dispose of 1,400 tonnes of "surplus" reserves. The Swiss government was lukewarm about the proposal, but damage to market confidence had been done. Germany and Switzerland have an especially important role because, along with the US, France and Italy, they constitute the first division players of the gold market. The five hold 590m ounces between them, more than half the total holdings of the official sector. Even if these countries wanted to sell gold, they are assumed to be trapped in a "prisoner's dilemma", each unable to sell significant quantities without undermining the price and incurring the wrath of the others. But if the market is expecting further sales, and the price is sliding anyway, this argument may hold less force. Dale Henderson, an economist at the US Federal Reserve, has argued that everyone would be better off if all official stocks were sold. Why, he asks, should the private sector waste money digging expensive gold out of the ground, when central banks could provide it more cheaply and hold interest-earning assets instead? The cold economic arguments for selling gold appeal at a time when central banks are under pressure to provide revenue for their finance ministries. They are supported by a broader strategic argument: continuing a trend that began after Iraq invaded Kuwait in 1990, gold appears to have lost its traditional function as a safe haven in times of political and economic uncertainty. The gold price rose relatively little when China fired missiles into the sea off Taiwan in 1996 and it has not benefited from recent stockmarket turmoil. "This has been the year in which central bankers have signalled that gold no longer holds a privileged position among their reserves," says Martin Fraenkel, managing director of Chase Manhattan's global commodities group in London. "The new generation of central bankers simply does not think of gold in the same way as their predecessors." But are the young whippersnappers shedding the misguidedsentimentality of earlier generations? Or are they forgetting the good returns and security gold has provided in times of high inflation and low real interest rates? The debate on these issues will be played out over the next few months, as Europeans determine the role gold will play in their new central bank. Opinions are divided, both among and within central banks. The younger generation, including some in the Bundesbank, share Mr Henderson's view that "if you are trying to be a modern, forward-looking central bank, you would best leave gold out of it". Traditionalists counter that gold reserves are essential to establish the credibility of what will be an unfamiliar and untested institution. Central bankers expect a compromise to be reached by the middle of next year, with the European Central Bank to hold perhaps 10 per cent of its reserves in gold, against an average 31 per cent for existing European Union central banks. Anything less than this and the market is likely to take fright again, asking itself whether the periodic rumours that the big five might sell gold are about to become a reality. + Copyright the Financial Times Limited 1997 "FT" and "Financial Times" are trademarks of The Financial Times Limited.

To: Bucky Katt who wrote (3369)	11/21/1997 5:30:00 PM
From: Richnorth	Read Replies (1) \| Respond to of 116811

I have read from scmp.com that about U.S.$50 billion would be needed. S. Korea has too much pride. At first S. Korea did not want to be bailed out by the IMF but circumstances compel it to seek help from the IMF. It is initially asking for U.S.$20 billion to see just how far it will go and then decide on how much more is needed. What will bailouts do for gold? In the near term? Long term? Too bad that S. Korea, unlike Japan, has no more U.S. bond assets to draw from to defend its own currency. In 1990, the exchange rate was about 745 won to U.S.$1.00. Now it is >1050 won to U.S.$1.00. Looks grim! Yea, what will that do for gold? Comments, anyone?