UK Treasury Announces Gold Reserves Sale

World Gold Council Reaction
The reaction of the World Gold Council has been one of surprise, and its press release sounds slightly critical of the Treasury announcement, viz:-
"has had an immediately damaging effect on the gold price, which fell nearly $7 to $281.50 an ounce in early trading in London."
"While the Treasury should be applauded for giving a detailed explanation ... it is nevertheless inevitable that this will be interpreted by the international bullion market as further evidence of official disenchantment with gold as a reserve asset."
"The irony is that Gordon Brown, the UK's Chancellor of the Exchequer, is simultaneously leading the charge on behalf of IMF gold sales - purportedly to assist debt relief in poor countries - while damaging the price by proposing to sell some of the UK's reserves in advance."
"The damaging reverberations of such a symbolically-charged action by the Treasury will be felt for many months to come, not only in the UK, but in a number of the 41 so-called Heavily Indebted Poor Countries in Africa and elsewhere."
"With each $1 drop in the price of an ounce of gold, these developing countries will suffer real economic damage."
"The drop in the price of gold on Friday as a result of the UK Treasury's announcement immediately wiped off $150 million from the annual export earnings of Sub-saharan Africa."
"The decision to sell gold and hold official UK reserves overwhelmingly in foreign currencies betrays a failure to consider the reasons why gold has always been considered an important defensive asset in the long term."

Other Recent Central Bank Gold Sales
In March 1998 Belgium sold 299 tonnes of gold, about half its gold reserves.
In July 1997, the Royal Bank of Australia sold 167 tonnes, about two thirds of its holdings.
September 1998, the Czech Republic sold 31 tonnes, leaving 14 tonnes.
In 1997 Russia sold 31 tonnes.
In 1997 Argentina sold almost its entire gold reserve of 124.8 tonnes.
In July 1998 Luxembourg sold 11 tonnes out of 12 tonnes of its gold reserves.
Between 1980 and 1996, Canada sold 594 tonnes, leaving just 81 tonnes.
In March 1997, Switzerland announced that it was to revalue its gold reserves to 60% of the market value, and consider releasing some of the surplus. This was expected to take many years, as Swiss law necessitates a referendum, which took place only in April 1999, we are still awaiting news of the outcome. They also reduced the gold reserve requirements for banknote issues from 40% gold backing to 25%.

Other Central Bank Holdings
In July 1998, the European Central Bank announced that 15% of its currency reserves will be held in gold, and as at January 1999, the Eurosystem, which comprises the ECB and the eleven member's national central banks, held 12,574 tonnes of gold making it the world's largest holder of gold, with over one third of total world reserve holdings, a total of about 34,000 tonnes. It is followed by the USA which keeps 53% of its reserves in gold.
In June 1997, Germany revalued its gold reserves, which I reckon at 2954 tonnes, from DM 144 per ounce to 60% of market value which was DM 590 at the time. This was probably for accounting purposes relating to EMU entry.
Other central banks have continued to hold gold, and many have increased their gold reserves in recent years.

Our View
We were not surprised by the announcement. It appears to be in line with current central bank thinking. Britain's currency was on the "gold standard" until 1931, whereby the pound could be converted to gold, and the Bank of England held gold as a reserve to underwrite the value of the pound.
Since the first world war, gold has had a reduced importance as a reserve currency, although debate still continues about its importance and wisdom. Probably only time will tell whether currencies need to be backed by gold or some other hard commodity. During the twentieth century, most currency has changed from a full intrinsic value to a token basis. Most people happily accept base metal coins and paper money, particularly in the more stable developed countries.
On the day of the announcement gold dropped $7.25 at one stage, but finished only $5.35 down. This size of fluctuation is fairly common, and our guess is that the price will recover within days. When the sales take place, if previous sales can be used as a guide, the price will hardly flicker.
As recently as 1996, gold was above $400 per ounce, compared with under $300 currently. Whether the central bank gold reserve sales have been the major cause is uncertain. In my opinion, they will have contributed to the price equation. Presumably at some time central bank sales will cease, and it is likely that gold prices will rise when this occurs.

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