The World Gold Council says countries seeking to join the EU need to build up gold reserves if they are to maximize their political and economic influence. But RFE/RL correspondent Ben Partridge reports that many economists say gold has lost its historical importance in today's low-inflation world.
London, 19 October 1999(RFE/RL) -- The World Gold Council said last week that the Central and East European applicant countries can improve their chances of joining the EU by building up their gold reserves.
The council is an international association funded by world gold producers to emphasize the role of gold as a hedge against inflation, and to promote its use in jewelry and design. The World Gold Council's new chief executive officer, Haruko Fukuda, spoke with RFE/RL in London, where the council is based.
Fukuda says a recent strengthening in gold prices is encouraging, since it shows the precious metal still has a role as a reserve asset and a store of value against inflation. Gold, of course, has long been regarded as the world's most reliable store of value. But in the past two decades, it has lost its appeal to many investors, sliding from a speculative peak of $870 an ounce in 1980, to as low as $255 earlier this year.
The most recent slump came after the decision of central banks -- in Britain, Argentina and Switzerland -- to start selling off government-held reserves, or to declare an intention to do so.
However, in recent weeks, gold has surprised world markets by rebounding to more than $320 an ounce. The recovery followed a statement by 15 European central banks that there would be no more sales of gold from government vaults in the next five years.
Fukuda says the agreement is the most significant statement made by official gold holders since 1971, when the precious metal was decoupled from the dollar. She said the agreement should encourage EU applicant countries to boost their gold reserves:
"The Eastern European countries, if they are going to join -- and they would like to join the EU, and possibly become part of the European Monetary System -- (then) gold will become quite important to them, because the European Central Bank, of course, has declared that it will hold 15 percent of its reserves in gold."
Fukuda says the experience of her own country -- Japan -- has an important lesson for the transitional economies. Tokyo held very small gold reserves after the Second World War. Subsequently, Fukuda says, Japanese officials concluded that a lack of government-held gold reserves was a major reason for Tokyo's limited political clout on the international stage, a weakness that lasted 30 or 40 years. "Gold is a product, a commodity, a form of reserves that does give governments independence. And in any international negotiating table, it is quite important that they can show they could leave the negotiating table and still survive. Some of the large countries, like Poland, the Czech Republic, Hungary, Romania, or even Slovenia or Lithuania, those countries which want to become part of the European Monetary System may well think that it is important for them to have some gold reserves."
But many analysts do not share Fukuda's upbeat assessment of the future role of gold. Commentator Martin Vander Weyer, writing this week in Britain's Spectator magazine, says gold has lost its fascinating mystique and become merely a commodity -- one that is expensive to look after and insure, and pays no dividends.
Vander Weyer argues that gold's traditional role as a sure protector of wealth has disappeared in today's low-inflation world. Other investments have proved far more lucrative. In the past two decades, gold has been outperformed 36 times by the Dow Jones index of shares on the New York Stock Exchange. As a result, the main buyers of gold in recent years have been jewellers.
Professor Michael Wickens, of Britain's York University, says that in the past, countries traditionally held gold as the ultimate hedge against inflation. But in today's low-inflation world, he says, it makes no sense to hold on to a nonproductive asset as a sort of "magic totem."
Wickens, a former economics adviser to the British government, says gold is now a very small part of the global financial system, as the world has shifted to a system based on highly reliable paper debts. For the countries aspiring to EU membership, Wickens says it is the strength of their economies, not the size of their gold holdings, that will be the crucial factor in deciding EU membership.
"It's all completely irrelevant. What will make them stronger candidates for entry is if they have got strong economies. The more they hold their assets in the form of unproductive gold, surely the less they can help their cause? It doesn't make any sense to me."
However, others say the present upturn in the price of gold is merely the beginning of a much stronger recovery, particularly if there is a "global bust" of world stock markets. If that is the case, and if Fukuda is right, the Central and East European governments may need to factor gold into their economic calculations.