Tuesday, February 14, 2006

Send it to your central banker...

England Wins Again: First In The Great Gold Selling Game
Date: February 14, 2006
By Our Man In Oz

It’s not every day that the people of Australia are prepared to doff their Akubras and say: “well done England, you win again”. After recovering from the shock, and quickly checking the back pages of the Telegraph to see if a cricket or rugby test was played overnight, a tiny little warning bell tinkles in the distance. Ahh, it’s those damned Aussies having a bit of fun, isn’t it? Yes, comes the confession, it is in fun, but fun to the value of around £1.5 billion – which is roughly the “winning” gap between how much Gordon Brown has cost British taxpayers by selling gold too cheaply, and how much his Australian counterpart, Peter Costello, has cost Oz by doing the same thing.

Experts will argue about the precise numbers in this game of who lost most but, one thing is absolutely certain, both Britain and Australia played a dumb game in the 1990s when they abandoned gold for a fistful of interest-bearing dollars, euros and yen. In fact, if there is to be an argument over the numbers it might be worth digging into precisely what interest rate the Bank of England and the Reserve Bank of Australia (RBA) actually got from re-investing the proceeds of their gold sales. What might have looked attractive in 1997 when Oz sold, and the three year period between 1999 and 2002 when the U.K. sold, would have been very unappealing when Japanese and U.S. treasuries dropped to 1% -- and less.

For the record, the great gold game was kicked off by Australia in July, 1997, when the RBA stunned the local goldmining industry by announcing that it had sold two-thirds of its gold holding, slicing the stockpile from 247 tonnes to 80 tonnes. The exit was stealthy, with all of the gold sold over a six month period without anyone outside the walls of the RBA’s headquarters in Sydney’s Martin Place told about the dramatic shift in national financial reserves. When the sales were announced it was fait accompli. The prices received were said to have varied from US$335 an ounce to US$360/oz, with the average assumed to have been US$350/oz.

Costello glibly told the world that “gold no longer plays a significant role in the international financial system”. Adding that Australia actually had large reserves of gold in the ground, and was digging it up as fast as it could. The gold industry branded it an act of treachery against what was then Australia’s second largest commodity export. Rob de Crespigny, then head of Normandy Mining, described the sales process as “clumsy”, adding that gold had to be treated as a long-term investment. De Crespigny capped off his criticism by pointing out that when the RBA made its sales announcement it did not even appear to understand the effect it would have on the gold price – which fell sharply in the weeks after. “If they were real pros they would have sold and bought back at the lower price,” he said, a suggestion which highlights to difference between a central banker and a businessman.

Brown, apparently a phantom admirer of the righter-than-right-wing Costello, was a willing subscriber to the gold sales policy, slipping 395 tonnes of the U.K.’s gold into the market in 17 auctions at prices which started at a truly pathetic US$254/oz – the absolute low point in gold’s 20-year cycle. Over the course of the auction process the average price received was an unprincely US$274.90 which, for the amusement of all, is spookily close to being exactly half the current would gold price.

The point about all these numbers, and to look back on what was the obvious folly of the gold selling programme, is to achieve two objectives. Firstly, how much out of pocket are both countries, and secondly: who won. In terms of dudding its taxpayers you have to say the U.K. is a clear winner. An estimate of the gap between what was fetched in the sales and what the Bank of England’s gold would be worth today is around £2 billion. The gap between what Australia got and what it would be worth today is about A$1.5 billion – when boiled down at current currency conversion rates you arrive at the U.K.’s “winning” score of roughly £1.5 billion.

Defenders of the gold sales policy will argue till the cows come home that they were right, and all they were really doing was obeying Lord Keynes, the man credited with dubbing gold a barbarous relic in 1923. True believers in gold will listen to this, feel annoyed, and then burst out laughing because the score in the great gold game is there on the board for all to see. Brown has cost his taxpayers around £2 billion, Costello has cost his around £500 million – and that’s after allowing for earning a reasonable amount of interest on the gold sales proceeds.

Perhaps the key question of all is whether the gold sales actually achieved their primary objective and strengthened the financial backbone of the two countries. The answer to that is a resounding no. Not only are the gold sellers poorer, they have achieved nothing by swapping a hard, physical, asset for a piece of paper backed by a rival central bank in some other country, a process of paper-swapping which might make for a bit of serious academic study one day because the paper-swap process lacks any semblance of the stability and permanence which comes from gold. Presumably someone has whispered in Mr Costello’s ear that gold has just touched a record level in terms of Aussie dollars. Minews has tried to point it out to Mr Brown, but as well as being blind in one eye , he also appears to be deaf.

Source : minesite.com


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