To:John Barendrecht who wrote (273) From: mikesloan Monday, Jul 7, 1997 1:03 PM Respond to of 80032
All a question of the right time Australian Financial Review July 8/97
Comment, by Joanne Gray
The Reserve Bank could have mounted an argument for cutting its gold holdings in the early 1980s as gold reserves had become increasingly irrelevant as a strategic reserve, and were a mediocre investment in terms of earnings.
But the right conjunction of fiscal, economic and political circumstances for a massive sale of gold reserves only recently occurred.
A sale by the RBA of two-thirds of its gold reserves in the late 1980s or early 1990s could easily have had a devastating impact on the currency which at that time was prone to sharp swings in value. Since then changes in the Australian dollar's value have been less dramatic and more gradual.
Foreign-exchange commentators say the $A has remained surprisingly resilient since the sale of $2.4 billion in official gold reserves was announced, and is still above the levels it reached after the last official interest rate cut in May.
Another uncertainty could have been the Government's reaction to the sales, and a cash-strapped government may have been tempted to appropriate some if not all of the profits from the sale.
But there was little danger of that with the Coalition Government, which has made substantial progress on cutting back spending and is regarded as taking its charter of Budget honesty seriously.
The reserves are available to underpin Reserve Bank action in foreign exchange and other financial markets in the event of a crisis, and are also notionally available in the event that a solvent bank faces a liquidity crisis.
Siphoning off some of those would have been the wrong signal for financial markets and a dangerous political statement.
It was therefore unlikely that Mr Costello would move to appropriate the proceeds for a short-term boost to the federal Budget bottom line. The Treasurer accepted the RBA's clear-cut submission that it was simply shifting assets from one class to another, and there was never a question that it would not keep the proceeds of the sales as part of its official reserves.
The bank's gold sales were always going to have an impact on the price of gold and gold producers' shares. But so far at least, the sale hasn't caused the gold price to fall as far as it did in the first two months of this year when the markets learned a central bank, later revealed as the Dutch, was selling substantial gold assets. In those two months, the price fell $US30.
The RBA has gone through several shifts in the make-up of the portfolio of international reserves since the 1970s.
It scaled back reserves of sterling-denominated securities in the 1970s, moving its international assets into US dollars because of the diminishing importance of Britain as a trading partner, and the declining value of its currency. Since then yen- and deutschmark-denominated assets have grown in significance in the RBA's reserves. http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=1714142
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