What if Canada Bought Back its Gold?

May 27, 1998

As a newbie gold bug, I have been reading the articles and essays by the contributors to Gold-Eagle. I have had some questions rise in my mind and would like to run them by the analysts.

In an article entitled "When Central Banks Sell Gold, Their Currencies Devalue" on February 7, 1998, Vronsky demonstrates how Canada's currency devalued by 11% in the time period from 1990 to 1997. During that time Canada started out with 14.8 million ounces of gold and sold 11.7 million to end up with reserves of only 3.1 million ounces.
(see http://www.gold-eagle.com/analysis_98/vronsky020798.html )

When there is pressure on our dollar, the Bank of Canada, as a last resort, steps in and buys back Canadian dollars. This usually has minimal or no effect on the immediate price of the Canadian dollar and none on the long-term stabilization.

When the Bank of Canada spends hundreds of millions dollars of foreign reserves propping up its currency, what actually happens? This measure reduces the supply of Canadian dollars in the market place, and therefore makes the remaining dollars 'worth' more. Currency traders are happy (for the moment) and the Canadian dollar stabilizes.

So, here is my question:
What if the Bank of Canada bought some of the gold they had previously sold instead? Wouldn't the effect be the same? My answer is "Yes", but now the fundamentals that are used when evaluating the Canadian dollar would change favorably and our dollar would be less likely to devalue in the future.

1) Canadian dollars would be worth more, because they would now be backed by a larger quantity of gold (the value of which is easily and accurately ascertained by looking at the world market, and not dependent on the whim of money traders' opinions)

2) The number of Canadian dollars out in the marketplace could remain the same, and therefore we would not have a surplus in Canada (which the money traders could use in the future to discount our dollar's true value).

3) The money traders' Canadian dollar holdings would be instantly worth more. They would be happier, and therefore more likely to hold Canadian dollars which would reduce the downward pressure on price (and self-fulfill the market's perception of value).

4) The foray back into gold ownership by a central bank would firm the price of gold, thus insuring the value of the investment. It may even cause it to rise slightly and make the investment actually worth more. When has this occurred by simply buying dollars?

5) Currency value is influenced by the perception that the market has regarding the government of the country. By taking this bold step, we would be viewed as proactive and decisive rather than reactive and helpless regarding our currency.

6) During most of the time between 1990 to 1997, Gold was selling at a higher price than it is now. It was good business to sell at the higher price. NOW, it is good business to buy when it is low.

7) Since we are a gold producing country, we can spend the money here, supporting our own industry and citizens.

8) There is a 45% tax on mining, so the government gets almost half of the mines' profits back in taxes. They get a further 30% back in income taxes on the wages that the mines pay their workers. They gain further by the reduced unemployment and welfare costs as a result of the increased employment in the mining and related industries. In short, the government gets a valuable leverage effect when spending the money in Canada - with many social benefits to boot.

9) (And probably the most important) We would gradually de-couple the Canadian dollar from the U.S. dollar. Our dollar would be measured more by the value of gold. (presently, it is the same since gold is measured in U.S. dollars. But with the introduction of the Euro, this may change)

10) $868 Million US at today's gold price buys 2.97 million ounces - and would almost double our present holdings. The headlines reading: "G8 Country Doubles Gold Reserves" would certainly bolster gold's price. If you doubt the truth of this statement, consider that the recent announcement of Russia selling on tonne of gold (approx. 32,000 ounces - or a cube about 15 inches on a side) caused a $4.00 DROP in price.

11) Besides, even if the purchase of gold didn't have the desired effect, they could re-sell the gold and go back to their old ways. (and probably at a higher price than they bought it at - see # 4 and # 10 above)

When deciding to take such a step, the pros and cons must be weighed. Gold holds its value and may increase simply because a purchase of this type would attract a lot of attention. Therefore, I see no downside to this action. We know the historical result of simply buying Canadian dollars. It is not effective in the long term. It is time for a new course of action.

I have asked my question. What say all of you?
Gold is the world’s oldest and most known currency.