"This year, investors will re-invent the power of gold as a reserve currency"
by Tom Peeters, Financieel Economische Tijd (Belgian version of "The Times")
Now, nobody seems to be interested in gold. On January 10, the POG went under the 280 $ level. In the beginning of the 80's, one ounce of gold was selling for 850 $ ! What is more, gold was during the past 10 years the worst investment possible. Someone who bought in 1987 10.000 $ in a fund, invested in 500 S&P companies, would have now more than 40.00 $. But someone who bought gold instead, has now less than 6.500 $...
Gold has lost its attraction and is now being treated as an ordinary commodity, just like copper, coffee or lead.
The big fall in the POG does not seem to be very logical. When we look at demand and supply, we can only conclude that it looks very favorable for goldbugs. The demand is now at a record level. Gold Fields Mineral Services calculated that last year, the total demand for gold rose by 16 %. The engine behind this increase, was the demand for juwelery, which increased by 15 %. Especially India, the Middle-East and Europe showed brisk demand. On the supply side, output from goldmines rose by only 2.3 %. In addition, the biggest South-African goldminegroups announced big restructurings. These should lead to cost reductions and should boost growth within and outside the country. We saw a merger between Golds of South Africa and Gengold. With a yearproduction of more than 130 tonnes is Goldco the second biggest goldmining company in the world. And Anglo American has put all his holdings into Anglogold and is now the biggest goldproducer in the world. This wave of mergers should normally have been very positive for the price of goldmining shares. However, the opposite was true...
De POG has decreased every year, with the exception of february '96, when it reached a peak of 417 $/ounce. Last year, there was also the Bre-X saga, which had a devastating influence on the POG. In addition, the issue about Nazi gold was also a negative factor. It is obvious that a number of Swiss banks have gold in their deposits, which has been taken (stolen) from Judish people during the worldwar II. When this gold would find its way to the free market, the this could cause again a negative effect on the POG.
But there is more. Golddealers fear that central banks will sell in the short term a large piece of their gold holdings. This would have very negative effects on the POG, since they are holding 35.000 tonnes or 30 % of the total volume of gold which has ever been produced ! Due to this, goldproducers started to sell forward a large portion of their gold deposits. This caused the POG to go down. In addition, speculative funds also sold a lot of their gold deposits. Also, it looks like a new generation of central bankers has born who are backing away from the gold standard. Examples are : sales of the bank of Argentina in december '97 of 124 tonnes of gold, their entire gold deposit. Instead, they bought American bonds, which had a yield of 5 % and which give an annual return of 275 mio $.
These sales of central banks undermine the position of gold as a reservevalue within the financial system. On the first view, this means that the future of the goldmining industry looks very bleak. But we can give 2 important remarks on this.
The first one is, that sales of central banks are not new. The 393 tonnes of gold which has been sold last year, was more than double of the average of the past 10 years. But much less than the 622 tonnes sold in 1992 and the 484 tonnes sold in 1993. But there is an important difference with the past. When in the past investors reacted on the news of effective sales, now they react on sales rumours. Such a roumur was the announcement last year by the Swiss parliament commission, that it would be better to sell half of the total gold deposit of the central bank.
But a number of analists do not think that central banks will now start to sell all their gold deposits. It is true that a number of European central banks anticipated the upcoming Euro and sold a part of their goldholdings. In March '96, Belgium sold 203 tonnes and in January '97, Holland sold 300 tonnes of gold. Australia sold in the middle of last year 167 tonnes of gold.
But according to goldanalist Frank Veneroso, these are exceptional transactions for a unique happening. By the beginning of May '98, these kind of operations will be finished. At that time, it will be decided which countries will be part of the EURO. This date is a date which will stimulate the official sales of gold, but marks at the same time the end of these sales. In a recent study by Williams de Br”e, a wave of sales by central bankers will by highly unlikely. When in 1975 the USA sold 530 tonnes and the IMF sold 1.600 tonnes between 1976 and 1980, the POG reached a low of 280 $/ounce. But this did not prevent the POG to go up again as high as 850 $/ounce. This study concluded, that the level of goldreserves by the European Central Bank will be highly influenced by the Geman Bundesbank. And they are in favour of a large goldreserve, backing the EURO.
David Scully, economist at Price Waterhouse, is referring to what happened in the end if the seventies, to explain the future high demand for gold. The sales of the USA and the IMF were the reason for the jump in the POG above the 800 $ level. It is true that sales had a negative effect on the POG, but institutional investors and financial institutions entered back into the goldmarket soon afterwards. Their reasoning was as follows : when the USA will not support their dolllars with gold, then it might be a good idea that private investors will take care themselves for this support...
Exactly this link between the dollar and its support (gold), is now causing a lot of problems with many economists. This is the second remark in the discussion on the waning role of gold as being a reservevalue.
It might well be that the financial crisis in South-East Asia will be the reason why the dollar, the world's biggest reserve currency, has in fact no backing anymore and that gold will become again the most important reserve currency.
In the short time, this crisis will have a negative effect on the POG, because of the depreciation of the Asian currencies. But in the longer term, the opposite will be the case. The weakness of the financial system, which was backed by the US dollar, will be apparent.
The Canadian economist Maison Placements arguments that the US dollar has currently little backing by gold, because the USA has during the past decade printed a lot of `paper dollars', in order to provide the world with enough dollars. After every crisis situation, the USA started to print a lot of extra dollars. This was also the case during the Asian crisis. But when the EURO will be a fact, a new strong international currency will be created and with the appreciation of the yen, the demand for dollars will decrease. And when the Asian countries and whith them other countries will start to doubt about the real strenght of the dollar and will realize that the greenback has nearly no goldbacking, it could be quite possible that the yellow metal will re-arise as the most important reservecurrency. And this just at a time when central bankers would like to abandon the gold standard.
The analysts of Maison Placements and Frank Veneroso think that the dollar bublle will burst in 1998. The POG in dollar terms will increase dramatically, due to the coming weakness of the dollar itself. So it seems that gold will still have a future. The days of gold being a reservecurrency do not seem to be over yet... When the rules of free markets between demand and supply of gold will be respected, we could be in for a dramatic surge of the yellow metal... |
