No sooner had this Market Update
featured a report on official-sector gold sales last week than
the European Central Bank (ECB) announced a surprise: It had
sold 47 tonnes of gold. The sales occurred between February 1
and March 11. The ECB also stated that its gold sales were now
complete for the year.
In this era of supposed transparency
in the official financial sector, one wonders why the primary
central bank in Europe, the most powerful signatory in the European
Central Bank Gold Agreement, would conduct a sale clandestinely,
announcing it after the fact.
The bigger question is why
the ECB felt compelled to sell gold at all.
Europe doesn't have a huge
balance-of-payments problem as the United States does. It's not
at war. Europe doesn't have a lack of currency reserves to tap
for foreign payments. So why liquidate gold when the dollar is
in severe trouble and gold is on the rise?
Forty-seven tonnes is a large
amount to liquidate over so short a time (less than 45 days),
and the sales no doubt damaged the gold price even though the
intent of the Central Bank Gold Agreement is to prevent such
stealth attacks on gold. In fact, the London Times linked the
sales "to sharp drops and recoveries" in the gold price
over the period.
To most observers the gold
price seemed no worse for wear. Gold started February in the
low $420s and reached its high for the period in the mid-$440s
in March at about the time the ECB was winding up its gold sales.
What might the gold price have done had the ECB kept its 47 tonnes
in the vault? Would gold have gone through the important $450
figure? Or $460? Even $500 if it had gotten on a roll?
Not knowing what prompted the
ECB to sell suddenly, we can only speculate as to what might
have been going on behind the scenes. Was some bullion bank in
trouble? Was there a severe shortage in the upper reaches of
the gold market that had to be filled on a moment's notice? Just
prior to the sales Germany had announced its refusal to sell
more gold, Switzerland had concluded its sales, and France was
supplying far less gold to the market than expected. Was the
ECB moving to fill the breach?
Leaving aside the ECB's agenda,
its gold sales are not without repercussions. They send the wrong
message at the wrong time.
Europe and the euro are already
reeling under significant alterations to the stability pact,
which restricted budget deficits and created the impression that
the ECB's member states were willing to make sacrifices for the
economic stability of the union. Gold originally was added as
a component of ECB reserves to give credibility to the new currency
and substance to the claim that the euro would become a rival
to the dollar.
By selling gold reserves, the
ECB calls that commitment into question and fuels criticism that
the euro and the ECB are no better than the dollar and the Federal
Reserve. The other day an editorial in the Financial Times went
so far as to say that "the euro does not have much to recommend
it, other than not being the dollar."
Mysterious, ungrounded, and seemingly inexplicable and unnecessary
gold sales are not likely to alter that assessment.
The Financial Times went on
to say that problems with the dollar, yen, and euro present good
reasons for selling all three currencies. The likely beneficiaries,
in the newspaper's view? Gold and the Chinese renminbi.
Since we may have to wait years
for China to revalue its currency, that leaves gold as the last
solid repository for savings -- nothing new for the metal of
kings and the king of metals.
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