Europe keeps hold of gold

EU central banks maintain huge reserves of the waning metal asset. Martin Howell and Danielle Bourgeois explain why

FEW investors would hold on to an asset that has lost two-thirds of its value in 18 years, has little chance of recovering much anytime soon, pays no interest and costs money to store - unless they are European central banks and the asset is gold.

The market value of the 13,000 to 14,000 tonnes of gold estimated to be held by European Union central banks and governments has dropped by up to $250bn (pounds 153bn) - equivalent to almost a quarter of the UK's annual gross domestic product - since gold reached an all-time peak of $850 an ounce in 1980.

Gold's decline has cut the value of the reserves to about $125bn, which is about $340 for each person living in the EU.

"There is no logical reason for any of the EU central banks to hold on to gold," said Dale Henderson, an economist with the US Federal Reserve, whose comments do not necessarily reflect Fed policy. "They would have been in a much better position if they had sold it 10 years ago and held foreign currencies instead."

With US prices last year rising at 1.7 per cent, the slowest pace since 1986, and Asia's financial crisis threatening global deflation, gold has lost much of its appeal as a hedge against inflation for both private investors and governments. Last Tuesday, it dropped to an 18-year low of $276.75 an ounce.

Yet, while Belgium and the Netherlands sold an aggregate 510 tonnes in 1996 and there may have been as-yet-undisclosed sales of as much as 500 tonnes from Europe last year, the EU's largest hoarders of the precious metal - the Germans, French and Italians - show little sign of rushing to dispose of their gold.

Their decisions are crucial for gold's prospects, as EU reserves could more than meet world demand for three years - most of going into jewellery, bars, coins and for use in the electronics industry.

"I see no reason, and the Bundesbank is making no efforts, to reduce its holdings of gold," said Guntram Palm, one of the German central bank's council members, last week. Gold reserves "were and are part of our stability- oriented philosophy".

That may be just as well, for the unleashing of a large portion of the reserves on to the market in a short space of time could lead to a collapse in the price and slash the value of the central banks' remaining holdings of the metal.

"There would be absolutely no floor to the price and it would be counter-productive," said Tony Warwick-Ching, a precious metals analyst at Flemings Global Mining Group. He said he expected there to be limited sales of perhaps 500 tonnes a year, which may eventually be co-ordinated by EU members.

The German stance is crucial, with as many as 11 of the EU's 15 members due to form a single currency, the euro, under the management of a European Central Bank from 1 January 1999.

The ECB, which is due to be set up in May this year, is expected to hold between 10 per cent and 15 per cent of its planned $55bn in reserves as gold, equivalent to only about 600 to 900 tonnes. That would leave more than 12,000 tonnes with Europe's current central banks, which will become satellites of the ECB through a European System of Central Banks.

The experience with hyperinflation in the 1920s, which helped to create the conditions for Hitler's rise to power, has given gold a special place in the German psyche. The Bundesbank currently has 3,700 tonnes of gold. "It is psychologically important for the Bundesbank to heap its gold as a safeguard for the population," said Ulrike Dennig, a specialist on Bundesbank monetary policy at the HWWA economic institute in Hamburg. "It wouldn't be very wise to sell it in the early stages of currency union."

In France, which has the world's third-largest reserves with 3,182 tonnes, there is similar loyalty to the metal. "French people are traditionally more drawn by the solidity of gold than by paper," said Herve Goulletquer, chief market economist at Credit Lyonnais. "The French who had invested in bonds and shares saw their savings wiped out during the two world wars - that leaves enduring marks."

Such arguments do not wash with other central bankers and analysts. "The idea of gold as a safe harbour, the idea that the laws of supply and demand of commodities don't apply, that's just not true," said Anil Kash-yap, professor of economics at the University of Chicago.

Eddie George, Governor of the Bank of England, said in November he would be surprised if the ECB holds much gold, as it is at the "bottom of the pile" of assets in terms of liquidity. The UK, which owns 717 tonnes, is not joining the euro initially and is unlikely to participate in the ECB reserves decision.

Copyright: IOS & Bloomberg

PROMOTED VIDEO
News
Jamie and Emily Pharro discovering their friend's prank
video
News
i100
News
Tim Vine has won the funniest joke award at the Edinburgh Festival 2014
peopleTim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
News
people
Life and Style
techApp to start sending headlines, TV clips and ads to your phone
Arts and Entertainment
Taylor Swift crawls through the legs of twerking dancers in her 'Shake It Off' music video
musicEarl Sweatshirt thinks so
Life and Style
tech
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Arts and Entertainment
Daniel Radcliffe and Zoe Kazan in What If
filmReview: Actor swaps Harry Potter for Cary Grant in What If
News
Our resilience to stress is to a large extent determined by our genes
science
Travel
travel
Sport
sportBesiktas 0 Arsenal 0: Champions League qualifying first-leg match ends in stalemate in Istanbul
News
Pornography is more accessible - and harder to avoid - than ever
news... but they still admit watching it
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Techincal Accountant-Insurance-Bank-£550/day

£475 - £550 per day + competitive: Orgtel: Senior Technical Accountant-Insuran...

Sales Performance Manager, Gloucester - £290 p/day

£200 - £290 per annum + competitive: Orgtel: Sales Performance Manager, Key Ba...

Junior Database developer (SQL, T-SQL, Excel, SSRS, Crystal rep

£25000 - £30000 per annum + bonus+benefits+package: Harrington Starr: Junior D...

Java/Calypso Developer

£600 - £800 per day: Harrington Starr: Java/Calypso Developer Java, Calypso, ...

Day In a Page

Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home
Lauded therapist Harley Mille still in limbo as battle to stay in Britain drags on

Lauded therapist still in limbo as battle to stay in Britain drags on

Australian Harley Miller is as frustrated by court delays as she is with the idiosyncrasies of immigration law
Lewis Fry Richardson's weather forecasts changed the world. But could his predictions of war do the same?

Lewis Fry Richardson's weather forecasts changed the world...

But could his predictions of war do the same?
Kate Bush asks fans not to take photos at her London gigs: 'I want to have contact with the audience, not iPhones'

'I want to have contact with the audience, not iPhones'

Kate Bush asks fans not to take photos at her London gigs
Under-35s have rated gardening in their top five favourite leisure activities, but why?

Young at hort

Under-35s have rated gardening in their top five favourite leisure activities. But why are so many people are swapping sweaty clubs for leafy shrubs?
Tim Vine, winner of the Funniest Joke of the Fringe award: 'making a quip as funny as possible is an art'

Beyond a joke

Tim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

Sadly though, the Lawrence of Arabia star is not around to lend his own critique
Wicken Fen in Cambridgeshire: The joy of camping in a wetland nature reserve and sleeping under the stars

A wild night out

Wicken Fen in Cambridgeshire offers a rare chance to camp in a wetland nature reserve
Comic Sans for Cancer exhibition: It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans

Comic Sans for Cancer exhibition

It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans
Besiktas vs Arsenal: Five things we learnt from the Champions League first-leg tie

Besiktas vs Arsenal

Five things we learnt from the Champions League first-leg tie
Rory McIlroy a smash hit on the US talk show circuit

Rory McIlroy a smash hit on the US talk show circuit

As the Northern Irishman prepares for the Barclays, he finds time to appear on TV in the States, where he’s now such a global superstar that he needs no introduction
Boy racer Max Verstappen stays relaxed over step up to Formula One

Boy racer Max Verstappen stays relaxed over step up to F1

The 16-year-old will become the sport’s youngest-ever driver when he makes his debut for Toro Rosso next season
Fear brings the enemies of Isis together at last

Fear brings the enemies of Isis together at last

But belated attempts to unite will be to no avail if the Sunni caliphate remains strong in Syria, says Patrick Cockburn
Charlie Gilmour: 'I wondered if I would end up killing myself in jail'

Charlie Gilmour: 'I wondered if I'd end up killing myself in jail'

Following last week's report on prison suicides, the former inmate asks how much progress we have made in the 50 years since the abolition of capital punishment