No golden path to stability

Posted on January 7, 2012


Ever since Europe slid into crisis there has been talk that gold might be a way out.  Why?  Because of gold reserves held by various central banks.  Italy, for example, could pay off a substantial part of its burdensome debt by unloading it gold stocks at current prices.

And here is the rub:  at current prices.  If word leaked that a substantial amount of bullion was about the find its way to market, the price would plummet, as indeed it has done on previous occasions when central banks decided to unload a bit of the yellow metal.

Bankers do not need to be reminded about August 1999 when rumours about central bank sales — coupled with some reality — saw the gold price crash to $251.71.  The bankers and politicians rallied, consulted, and put a stop to such sales, with the result that the price revived in two months to average $338.

It was a frightening — and, for some, expensive — lesson.  So there is unlikely to be any major sell-off of gold reserves.  But there is the prospect of using gold in the vaults of Europe as collateral for loans at rates more reasonable that might now be afforded to nation-states wallowing in debt.  After all, that is probably what has been happening for years with the huge gold stocks held by the United States.

According to World Gold Council figures, the countries of the Eurozone hold nearly 11,000 tonnes of gold that, should, at current prices, fetch nearly $600 billion, or a good deal more than the $125 billion that Greece owes.  But not anywhere near the sum total owed by the Eurozone to banks and international institutions.

Still, this is a sum worth toying with as part of a potential way out of the morass of debt and rising lending rates.  But what it has done has been to reveal once again how ridiculous is the concept of gold as a final store of value.  It has, after all, very little practical use and jewellery absorbs a mere fraction of the metal mined and produced.  Only the fact that the bulk of the world’s mined gold lies dormant and unavailable in vaults makes it relatively scarce and, therefore, valuable.

Like gem diamonds, gold is relatively plentiful, of little, other than decorative, use and relies for it high price on artificially restricted supply.  But, in the current global climate, the temptation to release supplies of gold — to cash in while it is possible — must be great.  In much the same way, diamond producers, especially in countries such as Zimbabwe and Angola are finding it quite lucrative independently to move stones to the market, forcing De Beers to buy them up in order to maintain prices.

Which is perhaps why, in what must be one of the shrewdest sell-offs of 2011, the Oppenheimer family unloaded their shares in De Beers, pocketing $5.1 billion in the process.