COMMENTARY — Silence isn’t golden

A series of high-level exchanges between gold producers and leading central bankers at the World Economic Forum in Davos, Switzerland, in early February enabled European central bankers to understand more about the market repercussions arising from their policies and statements.

Producers expressed concern that lack of clarity about central bank policies and intentions had lead to unjustified fears of large-scale and continuing gold sales that would further depress the price, affecting not only themselves, but the economies of the countries with significant gold mining sectors.

Producers pointed out that central bankers and government representatives had, from time to time, made statements damaging to gold as a reserve asset, as well as the ways such statements could affect markets.

Producers also intimated that they, like central bankers, were interested in gold from a long-term perspective, adding that today’s market was largely dominated by short-term speculators. As a result, prices had been carried far away from underlying market fundamentals.

Other issues that arose from the meetings included:

* the acknowledgment by central bankers that they recognized a community of interest with gold producing countries in avoiding a depressed gold price.

* the French and German central banks made clear that they would not sell any gold. The Swiss may sell a limited amount of gold to help finance its Solidarity Fund.

* gold in leading European Union countries, notably France Germany and Italy, is seen as supporting the credibility of currency. Switzerland shares the pro-gold atmosphere and culture of its larger neighbors.

* The new European Central Bank (ECB) will inherit the traditional attitudes of its constituent countries towards gold and their view that gold supports the credibility of the currency. Thus, gold would form part of the reserves of the ECB.

* All the gold reserves of the member states participating in the European Monetary union will form part of the external reserves of the Euro, Europe’s new currency, which will be introduced next year. Central bankers point out that the reduction in inflation had meant that gold had lost much of its attraction as a hedge against inflation and that there was pressure from governments to increase the rate of return on central reserves.

Gold producers made it clear that that they were not asking for protection from normal market fluctuations; they merely sought an end to the uncertainty.

— From a release issued by Geneva-based World Gold Council.