Gold Forecaster
- Global Watch
The aborted Italian gold
sales plan
Julian D.W.
Phillips
Gold Forecaster snippet
Aug 10, 2007
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Sales of gold by European Central
Banks are primarily for the adjustment of national reserves in
terms of structure or size. They are not intended under the rules
of the European Union, intended to pay the bills of the governments
of Europe, so when the subject came up, after a consistent record
of the Bank of Italy's refusal to even contemplate the sale of
the country's gold reserves, everyone was surprised. The reality
was suddenly the government of Italy wanted to put their hand
into the country's coffers in an exercise that would never have
solved the country's debt problems.
The Italian parliament approved
a reserve plan allowing the government to look into using
the Bank of Italy's substantial gold reserves to cut the country's
huge debt. Italy has some 62% of its foreign exchange reserves
value in gold at about 2,452 tonnes. The resolution inserted
into Italy's next budget committed the government to:
"Undertake, also in
its relations with the European Union, a survey of all instruments
useful to producing a significant reduction of the national debt,
through agreed ways of using the reserves of the central banks,
in gold and currency, in excess of that required by the agreement
with the E.C.B. for the defense of the Euro." The wording
suggested that Italy's government would try to re-think at
EU level the existing limitations on the use of the gold
and currency reserves of Europe's central banks. This was bound
to ruffle the feathers of the European Central Bank!
The government plan aimed to
cut Italy's debt to 103.2% of gross domestic product (GDP) in
2008 from 105.1% of G.D.P. this year, about €27 billion
($36.9 billion), using the central bank's gold and foreign exchange
reserves. If Italy were to sell 1740 tonnes of its gold
it would have achieved this target. However it would have taken
four years to do this under the 'ceiling' limitation of 500 tonnes
[if the C.B.G.A. is extended again under the same terms] provided
Italy was the only seller, during which time we have no doubt
the Italian's debt would have risen past the present level].
This achievement undoubtedly would have been swamped by the underlying
problems in the Italian economy within a smaller period of time.
Italy's debt is the world's third highest in absolute terms.
This plan was unlikely to change that.
Was this plan reasonable? Not
at all. Italy has had a very long record of poor management of
its currency management in common with other European countries.
One of the saving graces of the country with such a record is
that it had the wisdom to hold large gold reserves in case the
record continued, with gold always there to bail them out of
the mess. The Italians could have undertaken sales of gold after
Budget day 2008, once the Italian government had approved their
next year's budget. There was room though for gold sales, under
the present agreement, for around 370 tonnes in the last two
years of the agreement, which runs through until September 26th
2009, but no more. This would have made the exercise pointless.
It appears old fashioned now
to think that national spending behavior should be limited to
stop the bleeding, then repayment of debt undertaken, from new
income. In high debt situations the sight of gold reserves to
politicians in Europe [except in Germany] seems impossible to
resist. Add to that a complete lack of understanding of gold
as savings for a rainy day and you get another repeat of governments
grabbing the piggy bank.
Wisely, the Bank of Italy kept
silent. Because the plan crossed the lines of the Maastricht
Treaty and impinged on European Central Bank territory, it was
up to the European Central Bank to put the Italian government
in its place. Italy's approach was not solely an attack on gold
reserves, but an attempt to adjust the policies of the Eurozone
and interference in the activities of the European Central Bank.
The European Commission, was
sharp in its response on the use of the Bank of Italy's gold
reserves to lower the country's debt, saying, "It is
up to the E.C.B. to decide about the foreign reserves [including
gold reserves] of the ¤ area member states, in full independence."
Did we detect more than just
a re-establishment of the order of financial seniority here?
We would hope so in the days when the composition of reserves
is becoming a sensitive issue, with the importance of gold in
extreme times rising through the levels of priorities in the
face of a weakening $ and shaky credit?
The matter is now put to rest,
leaving a substantial shortfall in the 'ceiling' of gold sales
for the entire Central Bank Gold Agreement [2,500 tonnes] and
the balance of announced gold sales to date short of that by
around 400 to 500 tonnes.
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Aug 10, 2007
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
321gold Ltd
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