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Gold/Mining/Energy : Naxos Resources (NAXOF) -- Ignore unavailable to you. Want to Upgrade?

To: Kurt R. who wrote (7798)	1/4/1998 11:21:00 AM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 20681

Kurt, I read the WGC article with interest. If I may make a few comments. The author says The US is by far the largest holder at 24% of total official reserves, followed by Germany, France and Italy. Few observers believe sales by any of these countries are at all likely. Au contraire mon frere. There was an extensive debate in Germany just this past spring and summer on just that subject. The MOF and the political establishment would clearly like to sell gold and in fact tried to back the Bundesbank into a corner on this. The Bundesbank fought back and almost precipitated a political crisis on the subject. They were able to do this for just the reasons the author suggests elsewhere, German public opinion is nervous over losing the Dmark. The govenment backed down. The key here is that the politicians wanted to sell gold. The Bundesbank only bought time. Under EMU central bank authority and monetary policy will be clearly under political control and the Bundesbank will have lost power to effect the debate. Germany is the second largest holder of gold reserves and sales are inevitable. He also mentions Italy. There has been some suggestion in the gold markets that Italy is also considering gold sales for EMU reasons. The French have not indicated a desire to sell gold. The author discusses the Swiss panel that recommended significant gold sales and the Finance Ministers subsequent denial. A more careful reading of the Swiss FM statement will reveal some interesting points. Yes he said that gold sales would be slow and subject to referendum. But he also said it was clear that gold had its drawbacks as an asset for central banks but that since they had already paid for the gold he saw no reason to have sell quickly (it's been a few months so I forget the exact wording). In fact quick sales would disrupt the market. But the key is the Swiss Finance Minister questioned the value of gold and suggested it may be appropriate to sell some over a reasonable time frame. To the gold markets this was the equivalent of the Pope saying he know longer believed in Christ but was going to keep wearing his crucifix because he had already paid for it. His numbers on net official sales covers up something. The Dutch and Australian sales exceed the net sales. The reason for this is that several Asian econmies increased gold reserves. A quick reading of recent newspapers will indicate this is a trend that is likely to abate. He makes the arguement about holding it's real value. Two comments. The chart going back to 1796 shows something interesting. Gold is well above it's long term real value vs the dollar. It is only low in comparison to the last ten years. Secondlt, the point that gold maintains its real value over the years IS EXACTLY THE PROBLEM for central banks. In the current free capital flow environment the market has become very good at policing the actions of countries that debase their currencies. As a result interest rates in all countries exceed inflation rates. Investors in currencies therefor earn a return in EXCESS of the real rate of return. This is what is luring central bankers away from gold. Gold holds its real value while currencies are returning real value plus. Just my comments on the article. I do agree that a lot of the potential official sales are already built into the price. Also I am concerend by the number of Asian CBs who have begun pumping up their money supplies. Also Europe has been a deflationary influence as everyone has been tightening their belts to pass muster for the EMU. The final numbers for EMU will be coming out over the next few months. Once inside the EMU there will be no reason for austerity and some perverse incentives for profligacy. I anticipate that as we go through 98 we will gradualy see Europe adopt more inflationary problems. With both Asia and Europe becoming more inflationary I suspect that George Soros's recent shilling for his bond position will gradually fade and we will see more global inflation and consequently higher gold prices in '99 and beyond. Henry