REPRINT WITH PERMISSION OF WORLD GOLD COUNCIL
The Australian Gold Sales and the Aftermath
by Robert Pringle, Head, Public Policy Centre,
World Gold Council
18 July 1997
The Australian government appears to have been caught off balance by the fall in the gold price following the announcement on July 3rd that the country's central bank has sold 167 tonnes of gold, two-thirds of the official holdings. Mr John Howard, the Prime Minister, has defended the decision on the grounds that the Reserve Bank of Australia (RBA) was not acting any differently to central banks around the world.
However, the market reaction to the announcement has been much sharper than that following previous announcements by other central banks. In the week after the Australian announcement, the price fell by US$13 (from US$332 to US$319 six days later), whereas the maximum price change following previous announcements was US$10 and the average only US$4.
The crucial reason for this is that the Australian sale is widely seen as different, not because it is a producer but because of the reasons it has sold - with the aim of improving the return on its international reserves. All previous central bank sales or proposed large-scale gold mobilisations were motivated at least in part by special factors. Thus EU central banks like the Netherlands and Belgium were perceived to be motivated by a desire to qualify for European Monetary Union (EMU).
Australia is seen as the first country to sell primarily for portfolio reasons. Thus the Australian action is viewed in the market as widening the ranks of potential central bank sellers.
The RBA seems to have seriously underestimated the likely strength of this negative reaction. The Australian economy - and the world gold mining industry - now have to cope with the consequences. Any broad economic assessment of the costs and benefits of the move is likely to show the results to be overwhelmingly negative. The RBA will gain an estimated A$100 million a year in interest earnings. Yet the fall in the price in the week after the announcement reduced the value of Australia's gold reserves 'in the ground' by an estimated US $1 billion, and gold resources (not yet proven) by a further US $2 billion. Also, part of these resources and of current mining operations has been rendered uneconomic, jeopardising some of the 25,000 jobs in the sector, as well as employment in companies supplying services to the sector. Business confidence has been shaken.
The Australians maintain that they are in line with other central banks, whereas in fact they are way out of line. Contrary to information being reported in the Australian media, very few central banks have sold on any significant scale (Canada's extended sales programme is in a different category, since this has been spread over many years). According to the IMF, total official holdings have been reduced by 3,000 tonnes, or less than 10%, over the past 30 years. As of March 1997, official holdings still amounted to 34,096 tonnes. Despite all the media hype, the overall picture is one of massive stability.
Several other central banks have on the contrary been acquiring gold. These include China and Russia. Last year, it is estimated by Gold Fields Mineral Services that 19 countries acquired gold, against 16 that were net sellers. Again, Australia is out of line.
Moreover, leading central bankers - including even the Australians-accept the arguments for gold. So, why have the Australians sold? They say they can always acquire gold from domestic producers if needed, in an emergency.
This view ignores several key facts. First, gold in the ground takes a long time to produce and refine - and in an emergency, time is of the essence. Second, it is in the hands of the private sector, and would doubtless command a very high price in the circumstances in which it would be needed.
Moreover, even if the RBA's arguments were accepted, that does not justify doing harm to the reputation of an important international asset which is held by all leading central banks.
Central banks are supposed to safeguard future generations from unknown and unpredictable contingencies. Gold is generally viewed by central banks as a good asset against such long-term dangers.
The RBA has stressed that its current holdings of 80 tonnes 'is consistent with Australia's longer-term requirements' and there will be no further sales. It is not walking away from gold. That is small comfort to an industry which has received a shock from such an unexpected quarter - a shock which is likely to do lasting damage to the world gold industry.
Contact: R. Pringle, Head, Centre for Public Policy , World Gold Council, Kings House, 10 Haymarket, London SW1Y 4BP, U.K. Tel. +44.171.930 5171, Fax. +44.171.839.4314, or by e-mail: firstname.lastname@example.org