Gold Forecaster
- Global Watch
Gold sales - The reasoning
behind Switzerland's policy decision
Julian D.W.
Phillips
Gold Forecaster snippet
Jun 29, 2007
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The classic question has to
be asked again, what is the price of gold? If we answer $xxx,
then we have to ask the next question, what is the price of a
$?
Is the $ so reliable a store
of value that it can be used as a measure of gold? This questions
the very foundation of the paper currency system. Can one trust
the $ or even the international monetary system? It's all a question
of degree.
- The U.S. holds mainly gold
in its reserves, because it is the issuer of the globe's reserve
currency. This does imply that it is completely dependent on
its own currency, the $, in the global economy. As the foundation
of the world's monetary system, should the currency lose the
confidence of its own or other nation's citizens, the international
money and trade relations across the world will be damaged severely.
It is thought that this process is well under way.
a
- The Eurozone community's Central
Bank drew off 15% of its reserves in gold from its members. This
does not mean they intend to only hold 15% of its reserves in
gold, nor does it imply that there is a rigid exchange rate between
gold & the €. But the question of how to measure 15
of reserves is raised. From the beginning of the Central Bank
Gold Agreement the E.C.B. decided to sell a fixed tonnage of
235 tonnes of these reserves for paper currencies, ostensibly
to keep this rough proportion in their reserves. The E.C.B. is
fully aware of the dangers of measuring gold in the $ and in
the € for that matter, but for the sound functioning of
the paper currency world it is crucial that gold be subject to
measurements in paper currency terms and not the other way around.
With the higher prices this is around 25% of the E.C.B. reserves,
perhaps a level they prefer?
a
- Germany, who gained the option
to sell up to 500 tonnes of its gold, has not done so, citing
that "gold is a useful counter to the swings in the $".
Of course a doubling in the price of gold since making this decision
is paying off handsomely. We commend the pragmatism of the Germans,
for reserves are there for a rainy day and are not a pension
fund scheme to make it grow profitably. Certainly this can be
a secondary objective but never take over first place. The reserves
have to be credible in times of distress and acceptable to all
ones trading partners. Germany is aware that the times are a
changing and are keeping their eye on the future of the global
economic and monetary order and guarding against it.
a
- Italy has no plans to sell
any gold, which is unsurprising given the very poor history of
the Italian Lira. They too have seen several currencies come
and go in the last one hundred years, so they have few illusions
about the joys of compound interest, after all adding noughts
to a currency doesn't make them more valuable, it's the buying
power that counts. So, will the $ today, with interest added
over the next decade or two, be worth more than today's equivalent
in gold in a decade or two?
a
- The Swiss Franc has always
been one of the most stable of the globe's currencies within
one of the most stable and constant of economies. In times of
global war or uncertainty, this peaceful anti-war country becomes
itself a 'safe-haven' for foreigner's savings. So it is almost
a source of safe money and financial security in itself. So their
concept of a rainy day contains far less moisture than other
countries. It is therefore financially more secure and less dependent
on its reserves than other countries whilst being small enough
to adjust if reserve holdings within the foreign exchange markets
capacities at present. With the mix of gold and currencies in
their portfolio, their character being taken into account, you
can be sure they have covered their backs on the risk front and
stand to gain either way the cookie crumbles. So it is of little
account that they sell some more gold. We see it as a gesture
of support for the paper currency system, a gesture they see
as protecting their overall reserves portfolio.
So why sell gold, or more pertinently,
why sell a little gold and retain sufficient for bad times? It
is to ensure the retention of value in the overall portfolio;
it is not the getting rid of the gold content therein.
Clearly, Switzerland with its
constantly sound position as bankers to the wealthy of Europe
and its dependence on the banking industry, has a vested interest
in a mix of global paper currencies more so than those nations
that have an unsound Balance of Payments, smaller reserves and
face greater economic risks in the global economy [Other countries
with current account deficits include Australia, New Zealand,
Britain, France, Italy, Greece, Spain, Czech Republic, Poland,
India, Pakistan, Colombia, Mexico, Hungary, Turkey, South Africa
and others].
The big question is will gold
have a greater real value in times of distress than yield earning
national currencies? In the last world war, what value did the
Deutschmark or the U.S.$ have internationally [remember forgery
is one of the acceptable weapons of war]? And what value did
gold have? - No contest.
With economic power shifting
Eastwards and the Asian nations growing away from their dependence
on the U.S. economy, inevitably reserve currency dependence such
as we are used to with the $, is changing, is fragmenting with
other currencies coming onto the scene and with national interests
clashing and exerting pressure on the different important global
currencies. Should these pressures grow beyond a certain almost
indefinable point, then paper currencies will not garner the
same level of confidence as they do now, and the unquestionable
international reliability of gold as a measure of value will
ascend above paper money.
Prime Minister Brown of
the U.K. went the way Switzerland is, again, going to go in 1998,
looking for a more profitable content [?] to the U.K.'s gold
and foreign exchange reserves and paid a heavy price that is
growing as the gold price rises. Did he act for political reasons
in support of the € and the more controllable paper currency
system? We believe Switzerland may be following the same line
of reasoning as Brown did. After all, if we measured the proceeds
achieved from the last sale and the total value of those plus
the interest thereon, what would the shortfall against today's
value of that gold?
So the mix of foreign exchange
and gold reserves is essentially a gamble on the future.
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Jun 29, 2007
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
321gold Ltd
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