Prague, 14 July 1999 (RFE/RL) -- Gold prices this week fell to a 20 year low, continuing a long, slow decline afflicting the precious metal.
The low point of less than $254 an ounce came amid fresh rumors that there could be more sales by various central banks, following the Bank of England's auction of 25 tons of gold last week (July 6). That was the first of a series of envisaged sales by Britain of more than 400 tons.
The Swiss central bank is also known to be considering selling off part of its vast horde. Further, the International Monetary Fund has plans to sell some of its gold reserves to help finance debt relief to poorer nations.
So why is gold increasingly being sold off in big quantities, undermining its market value? For thousands of years gold has been at the center of mankind's dreams of wealth, a substance around which legends have been woven -- a thing not only of financial worth but of cultural significance. Our knowledge of long-dead civilizations springs partly from the gold objects they left behind, a testimony to the fact that gold has long been an object of fascination.
According to the London-based World Gold Council, the coolness which has developed towards gold in recent years is a matter of perception, not of substance. Council spokesman Keith Irons talked with RFE/RL today by telephone:
"There is a perception among some of the central bankers and particularly among what one might call the younger breed, who perhaps don't have an appreciation of the problems of the past, who feel that gold is not a useful asset."
In short, many modern central bankers simply believe that instead of being tied to great heaps of gold lying inertly in vaults, they can hold an increasing proportion of their assets in foreign currencies, particularly in the world's most important currency, the U.S. dollar. In contrast to gold, currencies have all the advantages of being easily transportable, they can be moved around the world electronically and can be held in deposits under normal security conditions.
Traditionalists are appalled by what they see as a short-sighted approach holding considerable risks because of unexpected currency fluctuations. The World Gold Council's Irons says:
"What they fail to appreciate is the long-term aspect of a nation's reserves. You should not retain reserves on a 10-year basis, more on a 100 to 200 year basis, and gold has been proven over a long period of time to hold its value, more than any other monetary asset."
There is a certain humor in the situation. Most of the public view central bankers as somber, ultra-conservative guardians of a nation's financial health. The pro-gold lobby is casting many of them in the role of "trendies" who are forgetting the troubles their parents and grandparents went through.
Irons points out that the central banks of Germany, France, and Italy are among those not contemplating any gold sales. During this century those three countries, now the biggest economies in Europe, have been through agonizing periods of currency instability. That included a time in Weimar Germany when people took their worthless paper wages home in wheelbarrows.
The concept that the values of national currencies should be backed by a specific volume of gold deposits, the so-called gold standard, has had a difficult ride throughout this century, being disrupted by war and economic depression. As the head of European Research at Nomura International, Adolf Rosenstock, points out, that linkage had withered by the early 1970s. That was when the currency system moved towards having only confidence as a foundation, rather than a specific commodity like gold.
Frankfurt-based analyst Rostenstrock says that like some of the central bankers, he believes gold stocks -- some 34,000 tons worldwide -- are indeed unnecessarily big. But he is still cautious about a sustained sell-off. He spoke by telephone today with RFE/RL.
"Just to keep a safety margin in times when confidence is damaged, for whatever reason, for whatever unpredictable reason -- history tells us that such things do happen -- it would be good to fall back on such a thing as good old gold."
Of course the decline in gold prices, which most analysts say appears likely to continue, is hitting the economies of the gold producers, the largest of which is South Africa (490 tons in 1997), followed by the United States (350 tons in 1997). The low prices are adding to Russia's economic woes (137 tons) and in Central Asia, Uzbekistan (81 tons), Kyrgyzstan (17 tons), and Kazakhstan (10 tons), are affected, as well as Tajikistan (3 tons). In East Europe, Bulgaria (2.8 tons) and Romania (2 tons) are also being hit.