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Chairman, ladies and gentlemen,
Thank you for your warm welcome. It gives me much pleasure to
be here at this distinguished gathering of the Denver Gold Group
Investment Forum. When Michele Ashby asked me some months ago
if I would make the Keynote speech over lunch I accepted without
hesitation because, even though I was new to the world of gold,
I was already well aware of the splendid reputation of the annual
Denver Gold Group meeting as the pivotal event of the gold industry
each year. What I did not know was that we would be meeting in
a dramatically changed environment of renewed confidence and optimism.
Before I speak on the latest development, I should like to pay a personal tribute to Michele for her courage and professionalism in arranging this annual event. I know how hard it is to establish and maintain the integrity of a global meeting of this scale year in and year out. She told me to keep going as the gold price declined daily to new lows in July. Today we are meeting at what will always be remembered as a landmark in the history of the gold market. As mining share analysts assess the impact of the new dynamics in the gold market on the future earnings of gold mining companies and their financial gearing strategies, I wonder how many mining companies have had to re-write their presentations during the last two weeks. I am privileged to attend this historic Denver Gold Forum and would like to ask you all to join me in expressing our gratitude to Michele for this important occasion.
On Sunday 26th September - just three weeks ago - a new era dawned for gold. For the first time in almost exactly 28 years, since convertibility of gold into US dollars for official holders was suspended on 15th August 1971, the governments with the largest gold holdings made a positive joint statement on gold. Those three decades have been a period in which gold was persistently sidelined by the official sector attempting to demonetise gold. In recent years the market has been plagued by persistent rumours of ever increasing official sector sales and each and every announcement of sale by central banks has acted as a trigger for a new downturn in the price of gold. Yet the amount of gold held in reserve by the official sector has barely declined during that period - a decline of a mere 6% in three decades. The attempt to replace gold with SDRs as a reserve asset was an abject failure.
The rationale behind the decision of the British government to more than halve its gold reserves earlier this year announced on 7th May has never properly been explained but it sparked off a fierce international debate on the role of gold as a reserve asset. In planning to bring the level of British gold reserves down to a mere 300 tons the Prime Minister told the House of Commons that gold has been 'a bad investment' and that 'other countries were selling too. The IMF is also selling.' Today that answer sounds singularly out of tune.
Acting as spokesman on behalf of 15 central banks - the ECB, the 11 national central banks in the European System of Central Banks (the Eurosystem), plus the central banks of Sweden, Switzerland and the UK - Mr Wim Duisenberg, the President of the European Central Bank, read out their historic five-point agreement on the sidelines of the IMF/World Bank Annual Meeting in Washington. The five points in the order in which they were put in the Communiqué were as follows. I read them verbatim:
We at the World Gold Council have christened it The Washington Agreement on Gold. I hope you will all also use this name.
The Washington Agreement was finalised and agreed over lunch on that Sunday in Washington of the Group of Ten central bank governors, and the US Secretary of the Treasury, Lawrence Summers, and the Chairman of the Federal Reserve, Alan Greenspan, were also present. It is a remarkable achievement. It is extremely rare for independently-minded central banks to agree to co-ordination of this magnitude on reserve management. This is not just one-off joint intervention in foreign exchange markets of the kind we see from time to time, but an agreement to last at least five years. The agreement is significant in several respects. It also raises some far-reaching questions for the future.
First, although it does not have the legal force of an international treaty, it is nonetheless an international agreement signed by each central bank governor, each having legal responsibility for his country's official gold reserves. For the UK, the Governor of the Bank of England signed on behalf of HM Treasury, where that legal responsibility rests. The agreement will be monitored by the Bank for International Settlements, with a dedicated unit to be set up there for this purpose.
While the agreement is between European central banks, including the ECB, it was put together through the Group of Ten central bank governors who meet regularly in Basle on a monthly basis. It therefore has a broader dimension in that the United States and Japan have been at least present at the G10 discussions and in agreement with the spirit of the agreement. Indeed, the Japanese government issued a statement in support the following day on 27th September stating that it also will not be selling or lending gold. The United States had of course stated its intention not to sell earlier on 20th May this year and neither the US nor the IMF lend gold.
Secondly, the agreement covers nearly 50% of the world's official gold holdings as the 15 signatories of the Washington Agreement collectively hold approximately 16,000 tonnes (including the 2,000 to be sold by 2005) out of the world total official holdings of 33,500 tonnes. Adding to this the US, Japan, the IMF and BIS (both of which have stated that they will abide by the spirit of the Washington Agreement), Australia, which already said earlier in July it will not sell any more gold, and South Africa, which has been actively opposing the UK sale, we calculate that over 85% of the world official sector holdings are now out of the market.
Thirdly, the agreement to limit lending to present levels is certain to reduce substantially any new supply of gold for borrowing, given that the US, Japan and the IMF are also out of this market. We estimate that about half of the currently outstanding gold leases of at least some 5-6,000 tonnes has come under the restriction of the Washington Agreement, and many of the countries not party to the agreement are thought to be already "fully lent" or are barred from lending by domestic legislation.
Fourthly, as I have been told by signatory governors of central banks to the agreement, there is good reason to expect that the agreement is watertight. Not only do the signatory central banks have legal control over their gold reserves, their governors meet every month in Basle. Eleven out of 15 participate in Economic and Monetary Union (EMU) and their gold reserves are already controlled in part by the ECB. The UK and Sweden, though not part of EMU, are also legally members of the European System of Central Banks. It is also possible that Switzerland will have associate status with the EU in future.
By 2005 when the agreement is to be "reviewed" both the UK and Sweden might be either in or preparing to be in the Euro, thus bringing their reserves under ECB control. How strongly politically motivated this agreement has been amongst the European nations is one of the questions that will be answered in time. But it is now certain, whether by default or intent, that the Euro has equal if not greater gold "backing" than the US dollar.
My perception is that there was a congruence of various factors that gave rise to this agreement. There were certain to have been Euro-political, world-economic, and market-related reasons. Perhaps the most interesting and far-reaching question for the future that comes to my mind is whether this agreement will end up as a forerunner in some form to a return to an official price for gold. Though that is unlikely and was certainly in no way intended to lead to this, at least one of the triggers for the agreement was the price falling to a level not seen since 1978. What level of price would be appropriate and acceptable by the major official holders for valuing their gold reserves? Will any of this imply central bank intervention in the conventional sense in the gold market and will BIS continue its co-ordinating function in future to encompass all the G10 countries? It opens up ultimately a whole host of philosophical as well as practical questions about the role, nature, and the "value" of gold as a monetary asset. In any event, the world's largest holders of gold have now said that they will be keeping their chestnuts in their bag; what will other central banks do?
As if not to be outdone by European central bankers, the IMF held its Press Conference on the HIPC debt relief the very next day on Monday 27th September. The confirmation that the IMF would not be auctioning its gold to finance debt relief but will use what it has called "off-market" transactions represented a double coup for all of us who have been campaigning for many months over this issue. Though we found it gratifying to hear the IMF spokesman say (I quote from the transcript of the Press Conference) ' I think there was quite an effective campaign by the World Gold Council, and I think the World Gold Council has said on the record that actually it welcomed this proposed change because it recognised exactly that an off-market transaction does not have and cannot have any impact on the gold price' (End of quote), it was a triumph for the concerted campaign by different parts of the industry pulling together. In essence the proposal now is for the Fund to sell up to 14 million ounces of gold to member countries with payments due to the Fund for past loans. The country would buy with SDRs or usable currency just the amount of gold worth, at market value, its debt to the Fund. It would immediately settle with the Fund by returning the gold, which would then be entered in the Fund's books at market price. The Fund's gold is valued at US$48 an ounce (SDRs 35) compared with the market value of over US$300 now. A straightforward revaluation for the required quantity of gold would result only in an accounting gain; moreover, such a revaluation is inconsistent with the Fund's Articles of Association. So the Fund has shown its customary flair for ingenuity in overcoming the technical difficulty.
As recently as this July, Michel Camdessus, with the backing of the Group of Seven heads of government, said that some open market sales of IMF gold would certainly be entailed in funding HIPC debt relief. It was only after the gold price hit a succession of new 20-year lows in July following the first British auction on 6th July that the Fund grudgingly admitted it was considering "several options" to make use of its gold. By then it seemed virtually certain that the US Congress would not approve the essential US vote on open market sales on the IMF Board. Opposition from US lawmakers came broadly from three camps:
1) those who ardently oppose virtually anything
the IMF does;
2) those representing gold-mining districts; and
3) those, such as Jim Leach, the influential chairman of
the House Banking Committee, who were concerned about the effect
on the mining industry in the developing world.
This third group, which included the Congressional Black Caucus, promised to be a growing one as the facts became more widely known - in part as a result of the circulation of the World Gold Council's study "A Glittering Future?" which no one has disputed in either substance or detail. It is worth noting that the economic research into the role of gold production in poor developing countries was started two years previously by the Public Policy Centre of the World Gold Council and that widespread dissemination of the findings of this research led to impartial observers who were concerned neither with politics nor gold interests also becoming convinced of the dangers of IMF gold sales and publicly expressing their concerns. The World Gold Council was then concerned with engaging the IMF officials in discussion on what alternative ways existed for the Fund to finance its portion of the HIPC debt relief throughout August and September. Some of you will have seen the exchange of correspondence between Mr Stanley Fischer, the First Deputy Managing Director of the IMF, and myself on the IMF and WGC web sites.
Far from gold being marginalised and finished as a monetary asset, the latest IMF proposal uses gold as money to pay back debt! What happened to SDRs, once thought to be the answer to external payment problems?
Gold is back with its customary charisma. I will tell you an amusing aside. The British Chancellor of the Exchequer may have thought he was getting rid of it. But as we speak today gold is being flown back to London in crates: Brinks Mat vans are busy delivering consignment stocks flown back from lying idle in all parts of the world to London, to the Bank of England and to other gold depositaries. Bullion banks need them for their liquidity.
What greater affirmation can there be for gold as a monetary asset than the declaration by 15 of the world's largest gold holders that 'gold will remain an important element of global monetary reserves'? Wim Duisenberg, the President of the ECB, in announcing the Washington Agreement, acknowledged generously that he and his fellow central bankers were influenced by the arguments of the World Gold Council and gold-producing countries: he had to blame it on someone! In private conversation, I have been told on good authority, Michel Camdessus too, who incidentally refers to the World Gold Council as the "Conseil de l'Or" as if this was a Byzantine institution, - it sounds grander in French - also acknowledges the role of the Council. But France and Germany who are known to have led the initiative have the tradition and natural understanding of the intrinsic value of gold. They understand that gold is no one's liability, that it is universal and eternal. They hold a large proportion of their external reserves in gold because they believe that gold is the only thing that will ultimately secure a country's monetary independence and sovereignty.
The Chairman of the Federal Reserve, Alan Greenspan, said on 20th May to the House Banking Committee soon after Britain announced its decision to sell gold that (I quote) 'gold still represents the ultimate form of payment in the world. Germany in 1944 could buy materials during the war only with gold. Fiat money in extremis is accepted by nobody. Gold is always accepted.' (End of quote) But even amongst friends, between Britain and America, gold played a crucial role in Britain's war efforts. Sir Martin Gilbert writes in his classic biography of Churchill that at the end of December 1940 (I quote): 'Relations with Roosevelt had reached a difficult point, almost a breaking point. Many of Churchill's most urgent requests for war supplies had failed to win the President's approval. Britain's inability to pay was proving a serious stumbling-block. Arms purchases for December, January and February amounted to US$1,000 million, but her gold reserves and dollar balances had been so depleted by a year of war expenditure as to total only $574 million. The Americans offered to provide the equipment for ten British divisions but, Churchill told his War Cabinet colleagues, wanted $257 million paid in advance out of these rapidly dwindling gold reserves. Roosevelt had gone so far as to send an American warship to the Simonstown naval base near Cape Town to collect the $50 million of Britain's gold reserves held in South Africa.' (End of quote) Roosevelt was clearly being advised by the US Treasury and the Fed that if Britain sued for peace the pound sterling would become valueless. Sir Martin Gilbert continues, referring to January 1941 (I quote): 'Even as Churchill and Hopkins talked, Roosevelt was announcing the financial solution; the United States would build what Britain needed and then lease it to her, on a rental basis, with payment to be delayed until after the war. But before this Lend-Lease arrangement came into force, Britain must pay all the debts she could in gold, and by the sale of British commercial assets in the United States. It was a hard bargain, depriving Britain of what was left of her economic strength. ' (End of quote)
Gold is, then, held in official reserve not just as an investment as the British Prime Minister asserted, but partly at least for the rainy day. Our Asian friends understand this well. During the recent financial crisis the South Korean government asked its people to hand in their gold to help the national economy. In 1991 the Indian government used its gold reserves to raise US$1 billion to avoid default. The Chinese, the Indian and Middle Eastern ladies hold on to their high caratage gold jewellery lest their husbands desert them. The World Gold Council has recently collaborated with the government of Indonesia, where the domestic currency has depreciated by over 80% against the dollar to introduce last month gold coins for saving to pay for the pilgrimage to Mecca. Gold comes into use at unexpected moments but when it does it outshines all else for its universal acceptability.
Now the pendulum has swung away from the extreme situation into which the gold debate had plunged. So what about the market? All of you are of course greatly better qualified to speak on this than I am. In any case the gold market is thick with its own private agenda and I am not really party to these. But I would like to comment on the more general aspect of the market - the part you would say ordinary lay people like myself can understand. Well-known, respected analysts have been saying "gold is finished", frequently misquoting John Maynard Keynes. Keynes, for instance, never wrote that gold is a "barbarous relic". What he wrote was (I quote): 'In truth, the gold standard is already a barbarous relic' (My italics; End of quote) - a very different concept. Keynes well understood the complexity and the multiplicity of the role of gold in economics. He understood too that gold meant different things to different people at different times and that its "value" is relative to other things - as the value of anything always is. Writing in 1923, rejecting the arguments to return to a gold standard, in his Tract on Monetary Reform he said (I quote): 'The value of gold has not depended on the policy or the decision of a single body of men; and a sufficient proportion of the supply has been able to find its way, without any flooding of the market, into the Arts or into the hoards of Asia for its marginal value to be governed by a steady psychological estimation of the metal in relation to other things. This is what is meant by saying that gold has "intrinsic value" and is free from the dangers of a "managed" currency.' (End of quote)
Today the dominant theme in the gold market is the impact of the Washington Agreement on the demand and supply balance; analysts and commentators talk as though the price movement of the last three weeks is entirely the responsibility of the European central bankers. But we all know that markets are made up of many independent forces and the determinants of price are not always immediately visible. On high levels of physical gold demand, the World Gold Council is confident of its analysis as it tracks in detail demand patterns in the major consuming countries. But as Keynes well understood gold has something to do with the stability of internal domestic prices and the stability of external exchange rates (and the two are of course linked). The Washington Agreement came at a time when commodity prices led by oil are rising faster than at any time for more than a decade. This could feed through to higher wage demands in time. Global economic prospects have picked up substantially with world GDP growth likely to exceed 3% for 1999; the US dollar has recently weakened with a growing trade deficit, and long bond yields have been rising. We are not here today to debate the prospects for inflation. But I would not totally discount the possibility that inflationary expectations may be a factor in the market. The Washington Agreement was certainly a trigger, a big trigger, for market participants to reassess their understanding of the marginal value of gold in relation to other things. We cannot yet judge whether the recent price movement in gold is indicating a wholesale change in the structure of relative prices. Many analysts still believe, though, that when the current panic short covering comes to an end the gold price will resume its downward spiral.
But when and how will the short covering "come to an end"? Nobody really knows the extent of the supposed gigantic short positions that have built up over the recent years, possibly even posing a new threat of instability related to those gold derivatives. What does seem certain to me is that the dynamics of the gold derivative markets have changed dramatically as a result of the Washington Agreement limiting central bank lending. The World Gold Council some months ago commissioned a major study on the international market in gold derivatives which we believe will continue to play a significant role in bullion in the future. We expect to complete this study early next summer. With this and in other ways we strive for greater transparency and to encourage all those concerned to make a balanced assessment of the role of gold in our economies.
If the Council has had an influence on this historic agreement, it is a result of work we have carried out over a number of years. I would like to mention in particular our work with central banks, where we have endeavoured to position gold as a reserve asset in the context of the changing environment facing central banks and the pressures on them, including the pressure to increase the yield on their reserve portfolio. This involves putting the case for gold in the language of modern portfolio management as well as in its broad historical context. It involves understanding how central bankers view the world.
But it is true also that central bankers do not live in a political or social vacuum. They themselves are influenced by broad currents of opinion as well as political realities. And one of these realities is that gold is still held in high esteem by electorates throughout the world. The people want their central banks to hold on to their gold. We have made sure that central banks do not forget that.
Today I have not talked about our extensive work at the World Gold Council through our field operations across the globe, keeping closely in touch with governments and public opinion, engaging in effective marketing of jewellery and gold products through retail support, design improvements, technical assistance in up-to-date manufacturing techniques, promoting gold banking and removing fiscal barriers to trade.
Last week I launched the first-ever international competition for excellence in gold jewellery design, Gold Virtuosi. The first prizes will be given in June 2000 in Vicenza - a Renaissance town in northern Italy, best known for the works of Andrea Palladio, the eternal elegance of whose architectural creations has been an everlasting inspiration for artists and architects the world over for successive generations. It is certainly the grandest public enterprise the World Gold Council has ever mounted. But gold has been given a tremendous endorsement in the twilight days of this century.
As the Millennium dawns, gold is poised on the threshold of a new era, promising as ever to bring excitement into our lives. Arousing always human passions, its mystique will never fade. As a Renaissance courtier counselled his ducal master "Cherish the ancient, cherish the golden, you will not be an antiquarian but a man of gold."
Reprinted by USAGOLD with permission of the Denver Gold Group. No further reproduction without permission.
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