European Central Bank gold sales further undermine euro credibility

by Michael J. Kosares

4-04-05

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.

Return to USAGOLD Market Update