EDITORIAL & OPINION — COMMENTARY — Gold sales fly in face of logic

The Chamber of Mines of South Africa condemns the method and timing of gold sales by the British government, which commenced with the public auction of 25 tonnes of gold by the Bank of England (BOE) on July 6. Since the British Treasury gold sales announcement on May 7, the gold price has fallen from US$290 per oz. to a new 20-year low of US$257.60 per oz. at the London afternoon fix after the first auction. This represents a decline of 11.2%.

The impact of the recent price fall is very evident for South Africa. Six gold mines have notifications with the Gold Crisis Committee for the retrenchment of 11,700 workers. This includes the closure of one gold mine with the possible retrenchment of more than 5,000 workers. It is also estimated that a further 70,000 jobs are at risk at the current price level. This means that the combination of planned retrenchments and further vulnerable jobs results in some 800,000 people being exposed to the possibility of no subsistence income. This does not include the jobs at risk for companies that either supply or service the gold mining industry. At a national macroeconomic level, through the industry’s huge multiplier effects, the impact of the price fall is evident.

The ramifications arising from the British announcement and first auction have been particularly significant and damaging for many developing countries and Heavily Indebted Poorest Countries (HIPCs). It is estimated that the recent fall in the gold price, if annualized, has wiped US$224 million off the exports of HIPCs. Gold mining is playing a critical role as a foundation for economic growth and development in many of these countries. In most cases, it is the only industry that has the critical mass to play this role. Of concern are the serious social stability consequences of increasing unemployment levels in these countries. Yet certain developed countries, through central bank gold sales or support for International Monetary Fund (IMF) gold sales, are undermining the very industry which has such an important role to play in most developing countries.

The announcement by the British Treasury of its intention to sell some 415 tonnes from a total reserve of 715 tonnes via an auction process has had a materially negative impact on the gold market. In particular, it has provided speculators with the necessary ammunition to short the gold market and drive the price down to its current low levels. The auction process itself on July 6, while being five times oversubscribed, provided market participants the room to short the market before the auction. The volatility in price, especially the price fall after the auction indicates the market’s unease with the method. The long time frame for sales also provides further room for uncertainty.

The timing of the sale announcement and auction appeared to show disregard for the other participants in the market. The debates around gold as a reserve asset in official institutions has been raging for some time. The British sale provided the opponents of gold with the argument that “Even Britain is selling,” despite the fact that central bank sales in the past 10 years have constituted less than 9% of total annual supply. In addition, in the same period, only six major central banks have sold material amounts of gold out of more than 130 gold holding central banks around the world. In particular, it appears odd that a country where gold has played a significant role as a store of value and medium of exchange for many centuries should sell gold at this time, and in a manner designed to be so disruptive of the market.

The British government should take note of the effect of its own gold sales. Developed nations need to consider seriously the implications of gold sales for those developing countries which stand to lose the most. In addition, the G7 countries should be aware of the fragility of the gold market in considering the real benefits and costs of any IMF gold sale. The reaffirmation by the national banks of the European Central Bank system and by the United States Federal Reserve of their intention to retain gold reserves and deal with these in future in a responsible fashion should be a lesson to other central banks around the world.

— The author is chief executive of the Chamber of Mines of South Africa.