U.S. Treasury declines to accuse China of manipulating currency

Section:

By Bill Jamieson
The Scotsman, Edinburgh
Monday, November 28, 2005

http://business.scotsman.com/index.cfm?id=2313142005

Higher still and higher climbs the price of gold. It closed up late
on Friday at $495.70 an ounce in London and was even higher in Hong
Kong.

Since the start of the month, the precious metal has gained almost 9
per cent, and there is growing confidence among traders that it will
break $500 before too long.

This is all deeply embarrassing for our chancellor, Gordon Brown.

Remember how some six years ago he declared he would sell 60 percent
of Britain's gold reserves held by the Bank of England?

Many suspected the exercise was designed to inspire confidence in
the then soon-to-be-launched European single currency. This was
because some of the proceeds were to be earmarked for the purchase
of euros.

In due course, Brown sold off 300 tonnes at just $275 an ounce --
close to a 20-year low.

Roughly a third of the proceeds were then invested in euros - which
then proceeded to plummet.

The gold price did not do much for a time. Now it has enjoyed a
stunning rally.

The result is a stonking loss on those Gordon Brown gold sales. In
fact, the Chancellor's disastrous foray into international asset
management now looks to have cost the British people some 2
billion.

One point he could enter in mitigation is that he was not alone in
this error. Other European central banks also sold down their gold
holdings. There was much conceit around at the time about the coming
emergence of the euro as the world's reserve currency.

Gold, by contrast, was a barbarous relic, one whose presence in the
world monetary system had persisted out of superstition rather than
logic. And unlike government bonds, it paid no interest.

But gold has systematically defied all attempts to expunge it from
the vaults of the world's central banks and from its perch as a
haven of last resort for millions of savers round the world.

Unlike many currencies, it is universally recognised as a store of
value. It is readily accepted in exchange for goods and services. It
is an excellent hedge in times of uncertainty and instability. And,
again unlike currencies, gold cannot be printed to order to help
debt-laden economies off the hook.

The latest surge is a reminder of gold's powerful global appeal. The
recent price strength has been due to continued demand from India
and China.

And it might also reflect, too, anxiety over coming instability in
the world's currency markets. Many traders do not trust the burst of
strength of the US dollar over the past year. The US currency was
widely predicted to fall sharply. Instead, it has been hitting new
two-year highs against the euro. Yet the twin deficits problem has
not gone away.

How strange that, despite all rhetorical declarations to drive out
gold from the vaults of central banks, its presence persists and,
indeed, looks set to increase in central banks vaults across Asia.

The strength of gold - and its lasting appeal to central banks - is
the subject of an informed analysis from fund management group
Bedlam (www.bedlamplc.com). I was struck by some outstanding graphic
showing how western governments still love gold - euro area
governments hold some 39 per cent of official gold holdings and the
US 26 per cent.

All the world's currencies, its says, are now "fiat" money, that is,
they lack any intrinsic value so are supported by faith, PR spin and
little else.

There's nothing wrong or, indeed, unusual about this - just so long
as politicians and central bankers act prudently and do not flood
the world with worthless notes.

Might the current era of a total acceptance of fiat money be drawing
to a close? Asian bankers may prove the key trigger as they seek to
diversify out of the dollar. The excessive monetary printing that
has already taken place looks set to drive the gold price higher, as
are confiscatory, anti-wealth taxes by governments. This is one of
the key reasons why gold remains so popular in continental Europe:
it is an excellent means of storing wealth without the authorities
knowing.

Bedlam's conclusions are thought provoking. It foresees an unsteady
rise, with the possibility of a blowout in 2007-8.

There are only 153,000 tonnes of gold above the ground and a maximum
of 2,500 tonnes a year from mine supply. It sees only a low chance
that in 2006 the gold price averages much below $450.

Modest forecasts suggest a 15-20 per cent gain by end 2006, or more
than three times the UK's current government long bond yield. So
some diversification into gold may start to appeal. "It is certainly
less naive," it says, "than the investment industry's present
consensus that government IOUs are a risk-free investment."

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