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To: yard_man who wrote (2695)	7/1/1998 10:04:00 AM
From: yard_man	Read Replies (1) \| Respond to of 86076

Contrary Indicator? Wednesday July 1, 9:46 am Eastern Time Dollar to top reserve heap, EMU puts gold rock bottom By Alden Bentley NEW YORK, July 1 (Reuters) - The euro will pose no immediate threat to the dollar but is making gold stores obsolete, as nations adjust external reserve holdings for European Economic and Monetary Union (EMU), economists said. Market speculation that the euro might displace the dollar as number one in central bank reserve stockpiles overlooks a more timely phenomenon: gold, once the world's monetary standard, is rapidly losing its shine, they said. ''If one is looking for a trend in central bank reserve behavior, the trend is simply to replace gold with U.S. Treasury bonds, with Japanese government bonds and with various European bonds,'' said Selig Sechzer, international economist at Alliance Capital Management. Reserve tinkering before monetary union on January 1 has increasingly marginalized gold, as have a remarkably benign global inflation environment and weak commodity prices. Gold hit an 18-1/2 year low of $276.50 per ounce in January then saw a brief rally before falling back below $300, where it has been stuck for a month. It stands more than $120 below the six-year high set near $418 in early 1996. ''Central banks don't want to hold it because of the somewhat disinflationary world where commodity prices are losing value relative to paper,'' said Alan Ruskin, research director at 4Cast Inc. In such an environment, gold loses favor as currencies gain value on commodities and goods, Ruskin said. Because gold and many commodities are chiefly priced in dollars, the buying power of the U.S. unit has gone up the most versus other currencies. As long as confidence in U.S. monetary policy remains high and investors have no fear that inflation will erode dollar-denominated holdings, central banks will continue to favor U.S. paper over the new euro and other reserve choices, he said. ''The dollar will at least be a solid currency, to the extent it is going to be part of a country with low inflation, which is a key element in terms of preservation of long-term value,'' said Ruskin. ''That in itself is going to slow the euro's progress in terms of taking over for the dollar in all sorts of spheres.'' The yellow metal's fate may hinge on how the new European Central Bank ultimately apportions it, vis a vis currencies like the euro, dollar, and yen. With just six months left until currency union, traders and analysts have come to dissect every utterance from top European bureaucrats for clues on the likely composition of the ECB's foreign reserves. Last month European Central Bank president Wim Duisenberg's suggestion that gold will comprise just 10 to 15 percent of the new bank's total reserves -- a figure well below forecasts -- highlighted gold's major vulnerability. Prices dropped $12 dollar per ounce in one week, after those remarks. Duisenberg has said the ECB's foreign assets policy is not yet developed. The disposition of the 11,000 tonnes of surplus gold among individual European central banks not absorbed by the ECB is therefore still an open question. CIBC Oppenheimer pointed out in a June 10 research paper that Germany, France and Italy, which as a group possess some 70 percent of Europe's gold reserves, have been stressing the importance of gold as a reserve asset in recent months. ''We highly doubt that Eurocrats would include gold as a core reserve asset in the ECB and then risk undermining the euro's credibility by allowing wide-scale disposals of gold by member countries,'' the firm wrote. Analysts said the euro will become a de facto reserve currency no matter what and should grow in importance. Sechzer noted that after January 1 central bank hoards of German bunds and other European assets will automatically be replaced with euro-denominated paper. Stockpiles of German marks, French francs and other ERM currencies will cease to be counted as currency reserves. ''The relevant thing for the first three years, or the first five years, is how credible the (European) central bank is and whether the euro is associated with improved economic performance and so on,'' said Chris Iggo, chief economist at Barclays Capital Group. ''The dollar is still the first-choice medium of exchange,'' he said. ''Commodities are still priced in dollars and so on and I can't see that changing in the near term.''