Globe and Mail reports
Swiss to sever gold's link to franc
Metal's image suffers as proposal to sell 1,300
tonnes of reserves could be next
Monday, April 19, 1999
ALAN FREEMAN
European Bureau
London -- The fight to retain gold's lustre as a key element of central banks' reserves has suffered another blow as the Swiss voted yesterday to sever the metal's formal link to the franc.
Although the change, included in a major overhaul of the Swiss constitution, won't lead immediately to gold sales by the Swiss National Bank, the Swiss could vote as soon as next year on a separate proposal to sell up to 1,300 tonnes of its reserves.
The threat of gold sales by the world's central banks, which collectively own more than 30,000 tonnes of the yellow metal, has hovered like a darkened cloud over gold markets for a couple of years now, and has been blamed for the failure of the gold price to rise above $300 (U.S.) an ounce.
Gold closed Friday at $284.10, up 40 cents.
In addition to Switzerland's move off the gold standard, gold producers have been worried by plans being considered by the International Monetary Fund to sell between five million and 10 million ounces (or as much as 300 tonnes) of gold to help reduce the debt burden for as many as 40 highly indebted poor countries, mostly in Africa.
Recently, the gold price fell by as much as $10 an ounce or 3.4 per cent when U.S. President Bill Clinton and French President Jacques Chirac announced support for the gold sale proposal.
Although gold sales by the Swiss or the IMF are not imminent, gold bugs admit the trend isn't helping the gold market.
Urs Frei, head of precious metal trading at Credit Agricole Indosuez in Geneva, said he doesn't expect the Swiss vote to have an immediate impact on the price of gold nor is he anticipating quick action by the IMF, yet the "psychological" impact on the gold market remains profound.
"The demonetarization of gold has been under way for several years now," he said.
The decision by Switzerland to finally abandon the gold standard is of concern to gold bugs because Switzerland is the fourth-largest single holder of gold in the world, after the Eurosystem of central banks, the United State and the IMF. Switzerland owns 2,590 tonnes of gold, accounting for 38.3 per cent of its reserves. By contrast, the Bank of Canada has sold virtually all of its gold holdings in a program that began in 1980 and gold now accounts for a tiny proportion of its total reserves.
In October, 1997, the Swiss finance ministry and the Swiss National Bank issued a report recommending that more than half of the gold stock be sold, about 1,300 tonnes, with part of the proceeds to be used to create a Solidarity Fund for humanitarian aid both at home and abroad.
Although Swiss politicians remain divided on the issue, yesterday's vote was seen as an essential first step to any future gold sales. The actual sales would require a separate vote by the Swiss electorate, likely in the spring of 2000, and it's expected that sales would be spaced out over a series of years, to reduce the impact on the gold price.
The World Gold Council, which represents major gold producers, has been attempting to put the best shine possible on the potential gold sales by both the Swiss and the IMF.
The council says the Swiss constitutional change doesn't "constitute a rejection of gold as a reserve asset, but a political and economic recognition that Switzerland could, by valuing these reserves closer to market prices, use some of the gold for budgetary and pressing social needs."
"Although there is a determination among some senior Swiss politicians and within the Swiss National Bank to sell some gold, it is evident that the debate as to the purposes of the proceeds from such sales is at a very early stage," the council said in a report on Swiss gold policy published this month. "If no political consensus emerges as to what the proceeds of any sale should be, it is conceivable that the impetus to sell may grind to a complete halt."
Hugh Williams, manager of central banking at the World Gold Council, said that if the Swiss decide ultimately to sell 50 to 80 tonnes of gold a year in a well-planned program, "the gold market is well able to absorb it." The real issue is whether the Swiss moves are part of a broader trend.
Although countries like Canada, Australia, Belgium and Holland have been selling gold, central banks in the United States, Germany and France have been opposed to selling their reserves and Mr. Williams noted that Poland's central bank recently bought 72 tonnes of gold.
The gold council also is trying to discourage the IMF from going ahead with its proposed gold sales, arguing that the sales could end up hurting the very countries they are supposed to help. The council notes that several of the poor countries destined to benefit from the gold sales, including Mali, Guyana, Guinea, Ghana, Bolivia, Sudan and Uganda, are gold producers in their own right.
"The fall in the gold price during 1997, a fall largely caused by fears of central bank gold sales, adversely affected these countries," the gold council said in a report. "There is a risk that further official sales, such as those proposed, could further depress the price."
The IMF is also concerned about the impact on gold sales on prices for the commodity.
"We do have to take care and we are concerned about any market implications that a decision to sell gold may have," said John Boorman, director of IMF policy development and review, in a briefing in Washington last week. "So we will approach this cautiously to make sure that doesn't happen." |
