(Kitco News) - Renewed worries about Eurozone sovereign debt has inspired discussions that nations at risk of defaulting should consider selling some of their gold or other assets as part of bailout packages to stabilize their economies.
This idea arose when some German politicians suggested a few weeks ago that Portugal should sell some of its gold reserves as part of a financial aid package for the beleaguered nation. Portugal eventually received aid without having to pledge any gold, but the notion for countries to sell metal reserves or other assets continues to reverberate.
After all, gold prices are just off nominal all-time records and selling reserves would be one way to pay down mounting debt levels. But to do so would not solve the problem and could leave countries in a worse shape than before, said George Milling-Stanley, managing director, government affairs, for the World Gold Council. As part of its mission, the council works with central banks and other policymakers regarding the role of gold in risk management.
“It’s like selling your house to pay down your debt. You can do that, but where would you live?” he said.
Of all the troubled southern-tier European countries, Portugal has the greatest percentage share held in gold of total foreign reserves. According to the most recent calculation of world gold holdings, Portugal has 81% of its total foreign reserves in gold, at 382.5 metric tons. That figure is calculated by the World Gold Council using International Monetary Fund's International Financial Statistics.
By tonnage, Italy has the most reserves of the PIIGS, at 2,451.8 tons, which is 69.2% of its reserves, and is the fourth-largest holder of gold globally, behind the U.S., the IMF and Germany. Greece has 111.5 tons of gold, which is 79.3% of its reserves and Ireland has 6 tons, which is 13.3% of its reserves.
Milling-Stanley pointed out that when looking at the official gold holdings of a particular country, it’s the central bank that usually owns the gold, not the government itself, and most central banks are independent of the government. That means it’s not an automatic decision governments can make to sell metal.
The idea of using gold reserves to payment has come up in the past for other situations and many times the idea pits government against central bank. There are a few examples, he said.
“Back when the German government … wanted to sell or revaluate their gold to pay for reunification, the Bundesbank said you’re not using the gold to do that. It caused a holy row that eventually calmed down,” he said.
The question to use gold to pay down debt specifically is unclear for the European Union, Milling-Stanley said. “This is just memory, but I think there’s been a fuss about selling assets to pay down debt,” he said.
He said Belgium and the Netherlands wanted to do sales before the European Monetary Union was set up. At the time, even before the European Central Bank was established, there was a lot of discussion among the European authorities about selling gold assets to pay off debt.
“I don’t know the strict legal definition – it could be legal but there could be restraint,” he said, adding that those who do know the legality of such a situation have stayed mum.
Milling-Stanley said one issue that European countries would have to deal with when taking into consideration any gold sales is the Central Bank Gold Agreement, which limits how much gold they can sell annually. “Even though European banks have not sold anything near the ceiling, it’s still there,” he said.
WHERE WOULD PROCEEDS GO?
Even if a country’s central bank sold gold, there’s no guarantee who would get the profits, he said. It wouldn’t automatically go to the government. Since the gold belongs to the central bank, they could very well keep it.
The Eurozone’s debt obligations have been at the forefront of discussion, but there’s been some talk that perhaps the U.S., with its significant reserves of gold, should sell some of its assets. Mary Miller, assistant secretary of the Treasury for Financial Markets, wrote in a post on the U.S. Treasury website that “this idea is not a viable option.”
Miller said that this idea has been rejected by Treasury Secretaries and U.S. Presidents of both political parties for many years. Miller referred specifically to selling gold to postpone raising the debt limit, but pointed out the folly to sell assets to raise short-term cash needs.
“A ‘fire sale’ of financial assets would be damaging to the economy, taxpayers, and financial markets. It would harm the interests of taxpayers, and would undermine confidence in the United States. Nor would such sales postpone reaching the debt limit for a meaningful amount of time. Congress would still need to raise the debt limit,” Miller wrote in a posting dated May 6.
(For the full essay, see: http://www.treasury.gov/connect/blog/Pages/Federal-Asset-Sales-Cannot-Avoid-Need-for-Increase-in-Debt-Limit.aspx)
At most, she said, considering the U.S. borrows $125 billion per month, assets sold would only buy a limited amount of time.
According to WGC data, the U.S. possesses the most gold globally in terms of percentage of foreign reserves and tonnage. Nearly seventy-five percent of its reserves are in gold, and it has 8,133.5 tons of gold.
“If we sold all of our gold, that would be $375 billion. So we’d run out of money in August and we’d have no asset to borrow against. It’s just a drop in the bucket. The problem is the debts are in the trillions. The basic point is it’s not a smart thing to do,” he said.
Furthermore, while other countries can diversify their total foreign reserve holdings with such assets like U.S. Treasury bonds and notes or U.S. dollars, obviously the U.S. cannot, which is one reason why the U.S. has high reserves in gold.
Does a sale of assets make sense at any time? Milling-Stanley said there are ways to use gold to help in fixing debt problems.
“What they (countries with debt problems) need to look at is a long-term, major structural reforms needed. Look at long-term structural reforms, then come up with the idea to not sell, but to use it as collateral to borrow from, but only once you get the reforms in place,” he said.
If the country used its gold as collateral without fixing the structural issues, then using the gold as collateral would just compound the problems, he said.
NOT DIFFICULT TO SELL GOLD
Right now, central banks are buying gold, not selling it. If a central bank and the country’s government came up with a plan to sell gold, it would not be difficult to do. But discretion would be paramount because the last thing a central bank would want is to have prices fall just as they were selling. He gave the example of Switzerland’s sale of 1,300 tons of gold in 2000-2005 as a proper way to sell, versus Britain’s gold sales which took place between 1999-2002. The advance notice of the sale drove down prices.
Most banks have a relationship with bullion banks so the sales can be handled quietly. But in the case of the U.K., an auction was held “so all the fund managers picked them off,” he said.
The Swiss sales were done quietly. “The Swiss sought out their in-house expertise – they sold 1,300 tons which is not small - but did it with maximum profit where they were buying and selling all the time so you couldn’t pick them off. They did it over a couple of years,” he said.
By Debbie Carlson of Kitco News dcarlson@kitco.com
This idea arose when some German politicians suggested a few weeks ago that Portugal should sell some of its gold reserves as part of a financial aid package for the beleaguered nation. Portugal eventually received aid without having to pledge any gold, but the notion for countries to sell metal reserves or other assets continues to reverberate.
After all, gold prices are just off nominal all-time records and selling reserves would be one way to pay down mounting debt levels. But to do so would not solve the problem and could leave countries in a worse shape than before, said George Milling-Stanley, managing director, government affairs, for the World Gold Council. As part of its mission, the council works with central banks and other policymakers regarding the role of gold in risk management.
“It’s like selling your house to pay down your debt. You can do that, but where would you live?” he said.
Of all the troubled southern-tier European countries, Portugal has the greatest percentage share held in gold of total foreign reserves. According to the most recent calculation of world gold holdings, Portugal has 81% of its total foreign reserves in gold, at 382.5 metric tons. That figure is calculated by the World Gold Council using International Monetary Fund's International Financial Statistics.
By tonnage, Italy has the most reserves of the PIIGS, at 2,451.8 tons, which is 69.2% of its reserves, and is the fourth-largest holder of gold globally, behind the U.S., the IMF and Germany. Greece has 111.5 tons of gold, which is 79.3% of its reserves and Ireland has 6 tons, which is 13.3% of its reserves.
Milling-Stanley pointed out that when looking at the official gold holdings of a particular country, it’s the central bank that usually owns the gold, not the government itself, and most central banks are independent of the government. That means it’s not an automatic decision governments can make to sell metal.
The idea of using gold reserves to payment has come up in the past for other situations and many times the idea pits government against central bank. There are a few examples, he said.
“Back when the German government … wanted to sell or revaluate their gold to pay for reunification, the Bundesbank said you’re not using the gold to do that. It caused a holy row that eventually calmed down,” he said.
The question to use gold to pay down debt specifically is unclear for the European Union, Milling-Stanley said. “This is just memory, but I think there’s been a fuss about selling assets to pay down debt,” he said.
He said Belgium and the Netherlands wanted to do sales before the European Monetary Union was set up. At the time, even before the European Central Bank was established, there was a lot of discussion among the European authorities about selling gold assets to pay off debt.
“I don’t know the strict legal definition – it could be legal but there could be restraint,” he said, adding that those who do know the legality of such a situation have stayed mum.
Milling-Stanley said one issue that European countries would have to deal with when taking into consideration any gold sales is the Central Bank Gold Agreement, which limits how much gold they can sell annually. “Even though European banks have not sold anything near the ceiling, it’s still there,” he said.
WHERE WOULD PROCEEDS GO?
Even if a country’s central bank sold gold, there’s no guarantee who would get the profits, he said. It wouldn’t automatically go to the government. Since the gold belongs to the central bank, they could very well keep it.
The Eurozone’s debt obligations have been at the forefront of discussion, but there’s been some talk that perhaps the U.S., with its significant reserves of gold, should sell some of its assets. Mary Miller, assistant secretary of the Treasury for Financial Markets, wrote in a post on the U.S. Treasury website that “this idea is not a viable option.”
Miller said that this idea has been rejected by Treasury Secretaries and U.S. Presidents of both political parties for many years. Miller referred specifically to selling gold to postpone raising the debt limit, but pointed out the folly to sell assets to raise short-term cash needs.
“A ‘fire sale’ of financial assets would be damaging to the economy, taxpayers, and financial markets. It would harm the interests of taxpayers, and would undermine confidence in the United States. Nor would such sales postpone reaching the debt limit for a meaningful amount of time. Congress would still need to raise the debt limit,” Miller wrote in a posting dated May 6.
(For the full essay, see: http://www.treasury.gov/connect/blog/Pages/Federal-Asset-Sales-Cannot-Avoid-Need-for-Increase-in-Debt-Limit.aspx)
At most, she said, considering the U.S. borrows $125 billion per month, assets sold would only buy a limited amount of time.
According to WGC data, the U.S. possesses the most gold globally in terms of percentage of foreign reserves and tonnage. Nearly seventy-five percent of its reserves are in gold, and it has 8,133.5 tons of gold.
“If we sold all of our gold, that would be $375 billion. So we’d run out of money in August and we’d have no asset to borrow against. It’s just a drop in the bucket. The problem is the debts are in the trillions. The basic point is it’s not a smart thing to do,” he said.
Furthermore, while other countries can diversify their total foreign reserve holdings with such assets like U.S. Treasury bonds and notes or U.S. dollars, obviously the U.S. cannot, which is one reason why the U.S. has high reserves in gold.
Does a sale of assets make sense at any time? Milling-Stanley said there are ways to use gold to help in fixing debt problems.
“What they (countries with debt problems) need to look at is a long-term, major structural reforms needed. Look at long-term structural reforms, then come up with the idea to not sell, but to use it as collateral to borrow from, but only once you get the reforms in place,” he said.
If the country used its gold as collateral without fixing the structural issues, then using the gold as collateral would just compound the problems, he said.
NOT DIFFICULT TO SELL GOLD
Right now, central banks are buying gold, not selling it. If a central bank and the country’s government came up with a plan to sell gold, it would not be difficult to do. But discretion would be paramount because the last thing a central bank would want is to have prices fall just as they were selling. He gave the example of Switzerland’s sale of 1,300 tons of gold in 2000-2005 as a proper way to sell, versus Britain’s gold sales which took place between 1999-2002. The advance notice of the sale drove down prices.
Most banks have a relationship with bullion banks so the sales can be handled quietly. But in the case of the U.K., an auction was held “so all the fund managers picked them off,” he said.
The Swiss sales were done quietly. “The Swiss sought out their in-house expertise – they sold 1,300 tons which is not small - but did it with maximum profit where they were buying and selling all the time so you couldn’t pick them off. They did it over a couple of years,” he said.
By Debbie Carlson of Kitco News dcarlson@kitco.com
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