Gold’s Mystique Tarnished Anew by IMF Sale Plan
In a world of haves and have-nots, the question seemed reasonable: Why shouldn’t a rich international organization sell some of its gold and use the proceeds to ease the debts of needy countries?
To the International Monetary Fund, which sits on a gigantic hoard of the precious metal, it seemed like a fine idea.
Yet the plan, which is key to a broader debt-relief effort announced last month by the world’s richest nations, has come under sharp assault in Congress, the gold industry and at least one of the have-not countries it is intended to help.
“It ain’t gonna happen,” declared Sen. Richard H. Bryan (D-Nev.), summing up a sentiment that has been gaining support in both houses of Congress.
The outcry over the IMF proposal to unload as much as 10 million ounces of gold worth roughly $2.6 billion--about 10% of its stash--has erupted as the latest expression of hostility to an institution whose approach to bailing out faltering national economies often raises the hackles of conservatives in Congress.
Critics are demanding that any proceeds be returned to taxpayers, who helped buy the gold in the first place as part of the original backing for the IMF’s lending activities. The United States is the IMF’s biggest contributor, and no gold sale could go through without Congress’ blessing.
“Relieving poor country debt is actually a good idea--but elected officials should make the decision, not the international bureaucrats who run the IMF,” House Majority Leader Dick Armey (R-Texas) said in a letter to colleagues.
But the IMF isn’t the only issue. The flap has grown for reasons that also have to do with gold’s role in a changing world.
Once upon a time, gold towered over mere cash as a symbol of everlasting value. Even after the metal was stripped of its status as anchor to the world’s currencies in 1971, nations coveted it as the ultimate insurance against inflation.
But at a time when inflation looks more like a nuisance than a menace in much of the world, and investors can choose among myriad ways to hedge against risks, official perceptions are changing.
The proposed IMF sale is just the latest development to erode gold’s mystique--and its price.
Britain on Tuesday sold 25 metric tons of gold, the first stage of a gold sale that could net it more than $3 billion over several years. Switzerland recently changed its constitution to allow huge future sales. Argentina, Australia, Canada, the Netherlands and Belgium have unloaded substantial portions of their national gold reserves in recent years.
At the start of the 1980s, when America endured double-digit inflation rates and equally high interest rates, an ounce of gold commanded more than $800. By the end of the day Tuesday, Britain’s sale had driven the price down nearly $7 an ounce to a 20-year low of $257.30 in New York. Since 1996, the price of gold has fallen by about a third.
Even in the foreign financial panics of 1997 and ‘98, overseas speculators fled not to gold but to the safety of the U.S. stock market and the dollar.
“Its role as a monetary asset has been vastly diminished,” said William B. O’Neill, director of commodity research at the Merrill Lynch investment firm in New York.
Some observers with a conspiratorial bent believe the world’s central banks have schemed to keep gold’s price down to a level that vindicates the banks’ own policies against inflation.
A more mainstream view is that Wall Street’s emphasis on large and speedy returns on investment has influenced the central banks, where a younger generation of officials may look with frustration on vast gold holdings that merely seem to gather dust in vaults.
Bank of England officials did little to contradict this view when they described their gold sale as a “prudent restructuring” of their reserves.
“You’ve got MBAs running central banks. They take a look at the gold sitting in the vault and they say, ‘Gee, this gold isn’t doing anything,’ ” said John C. Doody, editor of the Gold Stock Analyst, an investment newsletter in Nantucket, Mass.
The proposed offering by the IMF, whose reserves are the third-largest in the world after those of the United States and Germany, brings little joy to gold industry circles or their representatives in Congress.
In a June report, the World Gold Council, which represents mining interests, complained that the planned sale was depressing prices. It pointed out that some of the world’s poorest debtors, countries such as Zaire and Ghana, also happen to be gold producers that would be harmed by the decline.
“I don’t understand their insistence on doing something that’s going to hurt the very countries they’re trying to help,” said George Milling-Stanley, a gold market analyst in New York for the World Gold Council.
Already, the council claimed, lower prices have cost poor countries $150 million in export revenue. Officials in Ghana, an African debtor nation known in colonial days as the Gold Coast, have asked the IMF to halt the sale.
Wariness is also widespread in Congress. Some lawmakers, such as Bryan of Nevada and Senate Democratic Leader Tom Daschle of South Dakota, are focusing on home-state mining interests that oppose the sale. Others, including Armey and Senate Foreign Relations Committee Chairman Jesse Helms (R-N.C.), reflect ideological differences with the IMF.
“We are unalterably persuaded that selling IMF gold reserves would adversely affect the very countries the administration intends to assist and further damage the U.S. domestic gold industry,” declared Helms and Sen. Charles Hagel (R-Neb.), chairman of a subcommittee on international economic policy, in a letter to Lawrence Summers, who was sworn in last week as Treasury secretary.
The proposed IMF sale would pay for no more than 10% of the debt relief that wealthy nations announced with much fanfare last month in Cologne, Germany. The rich countries promised to write off $27 billion in debts owed by 33 needy countries. The total could go much higher, they said.
The United States, for example, may opt to write off about $4 billion in debt owed it by the poorest countries. The IMF has promised $3.6 billion toward the campaign.
But the U.S. and other countries are reluctant to hand over more money to the agency for any purpose. So IMF officials figure to raise the bulk of their pledge through the gold sale.
Then-Treasury Secretary Robert E. Rubin acknowledged the political opposition to the sale as “something we’re going to have to work through.”
But he also made clear that whether the goal is funding debt relief or financing the IMF or any other of the limitless demands for government spending, the United States itself is not about to join the ranks of nations reducing its official gold supply.
“I don’t think we should sell our gold,” Rubin said.
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Tarnished Gold
The precious metal is less precious than it used to be. From a peak of $850 an ounce in the inflation-plagued 1980s, it has lost its allure in these noninflationary times. Recent and proposed sales of gold by foreign governments and the International Monetary Fund have driven prices to a 20-year low. Annual peak and latest price per ounce:
1980: $850.00
Tuesday: $257.30
Source: Gold Fields Mineral Services
