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The Australian sneers at central bank gold sales ...

Section: Daily Dispatches

... for their nominal losses in a
rising market, without grasping
their real purpose -- to support
the official currencies.

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Nothing Like a Crisis
to Polish Up Image of Gold

By Robin Bromby
The Australian, Sydney
Saturday, January 19, 2008,25197,23073640-5001942,00.html

Just ask the Icelanders whether they subscribe to the argument that gold is a passive investment and a barbarous relic.

In two months the yellow metal held by the Central Bank of Iceland has grown in value by 25 per cent.

This year they'll be even happier in Reykjavik, as a consensus is emerging that the metal will bounce through $US1000 an ounce before 2008 is out.

Meanwhile, Britons, Swiss, Dutch, and other Europeans should be pounding the doors of their central banks asking why hundreds of tonnes of gold were sold off when it reached a 20-year nadir about seven years ago. Spot bullion was at a low of $US257.95 on March 30, 2001.

As well, the Reserve Bank of Australia sold off two-thirds of its gold reserves 11 years ago at what would now be bargain rates.

No sooner were the gold sales locked in than the metal in 2001 began a bull run that seems to have a way to go yet.

Gold topped $US900/oz this week and briefly hit $US914 before retreating as the week ended -- but it was still above the now shattered 1980 record of $US800-plus.

On Thursday, London-based precious metals consultancy GFMS joined the $US1000/oz crowd.

"Predicting the top is never easy but we always thought the $US900 barrier could fall quite soon and then we have to start viewing $US1000 as a clear possibility for later this year," GFMS executive chairman Philip Klapwijk says.

He warns, however, that a short to medium-term correction is possible as a reaction to the recent sudden rise and the need for funds to adjust their positions on the New York Mercantile Exchange.

That could mean somewhere in the low $US800s, according to GFMS, which predicts an average $US840/oz for the first six months of 2008.

Klapwijk then hastens to calm nerves: "With this period of consolidation out of the way and the funds in a position to let their nets out long again, that's when we should see the convincing drive towards $US1000."

Australian investors who bought early and often have done well. The yellow metal went through the local $1000 mark on January 9 and the Perth Mint has been finding no buyer resistance at that level. In fact, business is up this week, with gold buyers outnumbering sellers by 10 to one in Perth.

So physical gold is certainly on plenty of must-buy lists, but investors will also be concluding that gold, already at $1000 in Aussie dollars, means big profits for local producers who have low costs, such as Dominion Mining, whose gold was brought out of the ground at its Challenger mine during the September quarter for about $350/oz.

Dr Sandra Close, who runs the gold sector monitoring business Surbiton Associates, points out that a year ago the Australian gold price was $725/oz, when it was fetching $US540/oz.

Our dollar was then worth US75c. Now it has gained another US12c, but that still leaves plenty of cream for those who bought gold a year ago.

"We've come a long way since August 1971, when the gold price was first floated and broke free from its fixed price of $31.25 an ounce," Close says.

There have been many ups and downs along the way, she says.

While Iceland is enjoying the ups, Britain managed to pick the bottom of the downs.

In 1999 former chancellor of the exchequer Gordon Brown told the Bank of England to sell off 415 tonnes of gold, worth about pound stg. 4 billion ($8.97 billion) at the time. Today it would fetch close to pound stg. 12 billion.

One of the BoE's first gold sales went through at $US283 an ounce (contrast that with yesterday's price in Asia of about $US873/oz).

The average price the British received was $US275/oz.

The Dutch central bank, also that year, decided to dump 300 tonnes at equally low prices and many of the other European central banks started to clear out their vaults.

Of course, the yellow metal was distinctly out of favour at the Reserve Bank of Australia.

In 1997 we had the spectacle of the RBA -- located in one of the world's top three gold producing countries -- announcing it had sold off 167 tonnes of gold, two-thirds of its holdings. At least the RBA turned a profit: the metal had been acquired before the Nixon administration delinked the gold price from the $US.

The RBA had bought the gold at the official $US32/oz, selling it at $US332/oz in 1997.

Nevertheless, it was not a declaration of faith in gold, nor was it, with the benefit of hindsight and $US900/oz, a particularly good deal.

Actually, it seems only to be the central banks that see gold as a barbarous relic.

That tag was never really meant for the metal. The man who coined it, John Maynard Keynes, was referring to the gold standard, not the metal itself. His remark was made in the shadow of Britain's abandonment in 1931 of the gold standard to defend the pound. Now, all these years later, everyone, it seems, wants gold.

The Perth Mint reports being run off its feet by investors, small and large, anxious to buy the metal, even at today's fantastic prices, clearly in the belief that it will go even higher.

Why wouldn't they? They see bad news piling upon bad news in the US, one crisis after another in the Middle East, our banks losing money down the sub-prime plughole, the greenback being devalued as the Federal Reserve creates more paper money to stave off a recession or worse, property values shaky and rising doubts about some commodities, particularly base metals.

The Perth Mint holds about $1.5 billion of the precious metal in its vaults on behalf of investors. That pales into relative insignificance beside one of the largest exchange traded funds in the US. StreetTracks Gold Shares owns $US18 billion worth of gold.

From South Africa this week came news that its NewGold Exchange Traded Fund had exceeded $US740 million in assets as investors voted with their wallets in favour of gold going even higher.

The fund was reported last week to be looking for a bigger vault as its hoard grew apace.

Gold ETFs are backed by physical gold, so the more money that comes in, the more metal they have to buy.

We have seen, if not all of this, at least some of it before.

"From Bangkok to Bangor, investors are buying up gold -- and paying record prices for it. Scarcely a week goes by without a fresh blast of bad news to push up the value of the mystic metal that thrives on crisis," Time magazine reported on February 26, 1979. The same words could be written today.

Then the metal was heading for $US850/oz (or $US875 if you count an intraday trade three days later), a record that would remain until this month.

At that time the crises were Vietnam's invasion of Cambodia and the turmoil in Iran. The record would be set when the Soviet Union invaded Afghanistan.

Fast-forward to 2008 and there is certainly no shortage of crises.

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