To:Bobby Yellin who wrote (214) From: mikesloan Sunday, Jul 6, 1997 3:33 PM Respond to of 80032
Gold loses its glister in new world order Australian Financial Review July 7/97
By Stephen Wyatt
Gold hit its lowest level for nearly 12 years on Friday and the Reserve Bank of Australia is being isolated as the culprit. After all, the RBA did announce that it sold 167 tonnes of its gold reserves the day prior to the crash.
The RBA sale has been criticised as "unnecessary", prejudicial to "a key sector of its economy" and "motivated by narrow financial considerations" by the World Gold Council, a body funded by gold producers whose comments were made at "the request of members in Australia".
But it is not the RBA's job to stockpile gold to support the gold price, just as it should not have been the task of the Australian Wool Corporation to support the price of wool, another of Australia's golden fleeces, back in the 1980s.
No, blaming the RBA is like shooting the messenger. The real reason for gold's weakness is that, for the first time ever, the massive stocks of gold throughout the world are increasingly being viewed as part of gold supply.
To the uninitiated it is an obvious fact that stocks are naturally part of supply, but to the gold market this is an abhorrent, almost irreligious, concept. Gold is special. Or is it?
More and more analysts are arguing that, as every day passes, gold, becomes less special and is on the road to becoming a commodity.
It is on that road because of the extraordinary size of the world's gold stockpile and because of changes in the world economy over the past 30 years.
World central banks and international organisations hold about 35,000 tonnes of gold -- a third of the gold ever mined. And that's just official stocks; there are another 85,000 tonnes in private hands. In all this is 51 years of mine supply.
If any other commodity had a stocks-to-use ratio like this it would have fallen through the floor. As gold becomes more of a commodity and less a currency, issues like stocks become fundamental to its price. That is why Ted Arnold, metals analyst with Merrill Lynch, argues that 200-300 tonnes of mine production in the high-cost producing countries of South Africa and Australia needs to be closed down in order to establish some equilibrium in this market.
Why have world central banks bought a third of the gold ever mined? The massive gold stockpile was accumulated because historically gold has been more than a commodity. It has been money, an asset of last resort, a reserve currency and the ultimate store of wealth. In times of economic collapse, hyper inflation, political chaos or currency instability it was gold that provided insurance and security.
But this is decreasingly the case. The world is integrating, currencies are freely floating, derivative-market growth has exploded and inflation is benign anyway. There are many ways to cope with financial risk these days other than hoarding gold.
And cheaper ways. Apart from the 2,500 tonnes or so lent by central banks, gold is a dead asset. It costs the European central banks alone about A$19 billion a year in opportunity interest costs to just hold their gold. And Australia's Reserve Bank showed that, by selling gold, it could reinvest the funds received in US, German and Japanese Government bonds and earn A$100 million a year.
As a consequence, the role of gold is changing, especially as European governments try to slash expenditure to meet the EMU entry criteria this year, with Budget deficits supposed to be 3 percent or less of GDP.
"Whether EMU flies, falls or just hops along, the role of gold for central banks in Europe will never be the same -- as large, as passive -- again," says Andy Smith, precious metals analyst with UBS London. "EMU presages the opening of a freeway in gold's demonetarisation." Gold's journey from money to mere commodity is underway, and the central bankers, "having thought the pragmatic thought", will "not unthink it". By this, Smith means the role of gold as a reserve asset is being seriously questioned.
Dinsa Mehta, managing director of global commodities with Chase Manahattan New York, adds that downsizing of central-bank gold reserves is not only a European Union issue: "It's now orthodoxy to manage [lend or sell] gold reserves actively."
With the shift from currency to commodity, the gold stockpile will hang over the market and depress price just as other commodity stockpiles have.
Australia long ago stopped riding on the sheep's back. Soon it may have to stop riding on the back of its other golden fleece. Liquidation of the wool stockpile brought home to woolgrowers that there really was nothing special about wool. Perhaps the downsizing in gold stocks will have the same impact on gold producers.
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