Goldfinger’s Plan Backfires Again

Central Bank Gold Sales Began 10 Years Ago This Week:
Has it Worked?
In the spring of 1959, 50 years ago, the seventh of Ian Fleming’s James Bond novels, Goldfinger, was published. The plot (made into a classic 1964 movie) featured a crazy idea – to blow up all of the U.S. gold at Fort Knox, making it radioactive and worthless. That would make Auric Goldfinger’s gold worth more. However, he didn’t need to stage all that drama to make money. If he had just held on to his gold 20 years, it would be worth 25 times as much. A decade ago, some nations in Europe decided to blow out their gold instead of profiting from buy-and-hold. Their initial plan, from May 1959, has now backfired.
10 years ago, on Friday, May 7, 1999, the Bank of England announced that it would start selling a large share of its gold reserves in favor of assets offering interest rates – namely bonds. That announcement came after a decade of gold going nowhere, causing the impatient anti-gold forces among central bankers to demand a positive return on their investments. On the day of the Bank of England announcement, gold was trading $282.40, but the announcement of the forthcoming sale drove gold prices down to 20-year lows over the next 90 days. In fact, gold traded narrowly between $252 and $262 per ounce all through July & August of 1999, due to the anticipation of the damage done by massive central bank liquidations.
Many central banks followed Britain’s example, including France, Switzerland, Spain, the Netherlands and Portugal. As a result, the proportion of gold in central bank coffers has now slipped from 60% (in 1980) to 10%. European banks eventually sold around 3,800 tons (122 million ounces) of gold, freeing $56 billion to buy their beloved bonds. However, that sold gold would now be worth twice is much: $112 billion! Central banks are finally learning to hold on to their gold. Last year, central banks sold 246 tons, the lowest annual sales in 10 years – equivalent to about 10% of newly-mined annual supplies of gold.
Even accounting for the interest income on the bonds, a study last week showed that central banks lost $40 billion by selling their gold prematurely. The biggest loser was the Swiss National Bank, which sold 1,550 tons over the last 10 years, or more than 40% of all central bank sales. As a result, the Swiss are $19 billion poorer than they would have been by holding on to all their gold. Meanwhile, the U.S., Italy and Germany held all their central gold, so they now represent three of the four top national holdings:
Largest Gold Holdings among Central Banks
United States…………………..8,138.9 (no sales since 1999)
Euro Central Bank…………….6,434.7
Germany…………………………3,412.6 (no sales)
Int’l Monetary Fund…………..3,217.3
France……………………………2,487.1
Italy……………………………….2,451.8 (no sales)
China……………………………..1,054.0 (and rising)
Switzerland……………………..1,040.1 (down 60% since 1999)
Bottom line: A decade ago, the Dow was 11100 and gold was $277, for a 40-to-1 ratio. Today, the Dow is 8450 and gold is $910, for a 9.3-to-1 ratio. Translated into comparative performance over a 10-year period, gold provided 330% greater returns than the Dow since the day central banks began selling gold.
Gold Baffles the Gurus
Experts Yell “May Day” Way Too Soon
Last Monday, May 4, was a bank holiday in most of Europe. Originally called International Worker’s Day, the first Monday in May has now morphed into a genteel bank holiday. Last Monday, London’s Financial Times surveyed several gold gurus and concluded that most long-term bulls were turning short-term bearish. Dennis Gartman, for instance, was quoted as saying, “I don’t think gold recovers for a long time. You will be surprised by how far down it goes. I can see gold going back to $750 with ease.” The FT’s bottom line advice was to “wait until it gets close to, or past, $800” to buy. The next day, however, gold rose $25 per ounce and stayed cover $900 all week, making all those gurus look a little foolish.
Silver rose even more dramatically, from $12 to $14 in three trading days. The initial impetus for the recovery in the precious metals was a weaker dollar (down 3% to the euro last week, measuring from Monday’s peak to Friday’s trough), plus fear of future inflation, based on record-high levels of money supply creation by the world’s central banks. In addition, oil and natural gas were rising dramatically in price, even though inventories were large and growing. Then, the Euro Central Bank (ECB) cut rates to 1% last week. Lower rates make gold seem more competitive on a total return basis, since gold offers no interest income. After all, the lure of high interest rates initially drove central banks to sell their gold 10 years ago today. Here is the capsule tale of the tape from precious metals last week.
London Daily pm Fix…………….Gold………………Silver………………….Platinum
Year-end 12/31/08………………..865.00……………10.79……………………….899
Friday, May 1……………………….884.50…………….12.15………………………1076
Tuesday, May 5……………………910.00…………….13.11………………………1135
Wednesday, May 6……………….910.00…………….13.44………………………1136
Thursday, May 7…………………..912.25…………….14.01………………………1161
Friday, May 8……………………….907.00…………….13.90……………………….1149
Changes Last Week………….+$22.50 (+2.5%)….+$1.75 (+14.4%)……….-$99 (+6.8%)
Changes so far in 2009………+$42 (+4.9%)……..+$1.36 (+28.8%)………+$177 (+27.8%)
Gold 52 weeks ago (May 9, 2008): $876.00…………….Gold’s low for 2009: $810 on January 15
Gold’s average price during 2009 so far: $904.06…….Gold’s high for 2009: $990 on February 24
Bottom line: Gold gurus, like most other gurus, are adept at extrapolating short-term trends into long-term and non-sustainable straight lines. This refers to downward trends as well as upward surges. (The same Wall Street firm that predicted $200 oil a year ago predicted $40 oil when the tide turned last summer.)
(Posted by CWS contributor Gary Alexander.)

Posted by on May 11th, 2009 at 12:59 pm


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