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Gold Sales for Solvency Remain Unlikely
Greece, Portugal, Italy, Spain, and the US – the list of places grappling with current or forthcoming debt issues seems to be growing. Is this a roll-call for another financial disaster? If these nations can’t come to some kind of productive fiscal agreement debt ratings will be downgraded and default around the corner. Does this mean a fire sale might be around the corner for gold?
Past performance is not indicative of future results.
***chart courtesy of Gecko Software
One of the recent headlines I saw was exploring the potential of a gold sale from central banks as a way to deal with government debt. I know I explored the idea of whether or not the US would do this, but I think it is worth looking at again. Debt issues are weighing heavier on the equity markets lately, and investors are pumping a lot of fear premium back into the markets. If governments and central banks get desperate to put things on an even keel, how likely is it that they may liquidate their assets? From where I am sitting, the chance is close to zero.
There are a couple of factors that will inhibit the sale of gold holdings. The first is the agreement that many central banks in Europe are signatories on – the Central Bank Gold Agreement. This was a commitment from signatories to limit the amount of gold they would sell in a set time period. Now, this does not mean that banks like Banco do Portugal, Banco de España, Central Bank of Ireland, or any others can’t sell any gold, but it does put a damper on all of them liquidating indiscriminately and collectively. The IMF and Federal Reserve are also loosely associated with the gold agreement although they are not formal signatories.
The collective ceiling on sales is 400 metric tons this year. Of that, the current report shows just over 53 tons sold as of the beginning of June. 0.2 tons of that came from Greece. In keeping with their sales in previous years, that is about par for the course. If they did need to empty their gold holdings, the debt-troubled Mediterranean nation is only officially holding about 111 tons. Compare this to the 8,133 that the US has or the 2,451 Italy officially keeps. Even Portugal has just over 382 tons according to the official gold holdings found on the World Gold Council’s website.
The other element I see that makes this unlikely is the current global economic condition. Selling an asset preservation tool like gold (or any other precious metal) in the throes of such uncertainty is not a move I expect any bank to make any time soon. More banks have recently become buyers of gold assets. Mexico and Russia are among the names that spring to mind. No one can predict how far or wide the debt problems will spread before the recession is really over. That bolsters the idea of....
Source at: Newsletter.berkshireassetmgt.com
This post has been edited by bullionfk: Jul 13 2011, 11:28 PM