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

Start your day with The Independent, sign up for daily news emails
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the iWatch for you? Well, it depends if you want for the fitness tech, or the style
Astronauts could be kept asleep for days or even weeks
scienceScientists are looking for a way to keep astronauts in a sleeplike state for days or weeks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own