South Africa’s gold producers are pooh- poohing the effects of the IMF’s proposed gold sale, but such a sale would set a dangerous precedent. Donna Block reports
The proposed sale of 10% of the International Monetary Fund’s (IMF)gold reserves to fund debt relief for poor developing countries is by no means a foregone conclusion. In fact, it might never happen.
According to John Lutley, president of the Washington-based Gold Institute, the United States government has made no commitment to sell its share of IMF gold and can only do so with congressional approval. Without US consent the plan is dead. So far the Clinton administration has said it supports the proposal but if Lutley and his army of gold lobbyists have their way, the sale will never take place.
When the idea was first floated a few years ago South Africa’s gold barons nearly had a fit. In a weakening gold market with production levels dropping, the sale of large amounts of gold was the last thing they wanted. These days, however, rather than fight the proposal which would make them look greedy and insensitive to the plight of the world’s poorest countries they have opted to dismiss the sale as being irrelevant.
Analysts say the reason for the gold industry’s nonchalant attitude is that they are more afraid of the effect on their company’s share price than they are on the spot price of gold. Unlike their counterparts in the US who are furiously lobbying Congress to halt the sale, South Africa’s gold mining industry is playing down the proposal made by IMF donor nations.
Most gold executives and some analysts say they are unconcerned about the latest gold- for-debt scheme but that the perception of a large sale has had a psychological effect on the metals market. Jonathan Best, finance director at Anglogold was dismissive and said the IMF sale would be a non-event.
“The market’s been aware of the IMF sale for years and will be able to absorb the gold that comes into the market. It’s a relatively small amount,” he said, and added that it would not hurt South Africa.
Overseas investors see this as a blatant attempt by South African producers to keep their share prices stable, especially ahead of Anglo American’s listing in London.
“If they came across as worried about the proposed gold sale, their share price would drop” said one New York broker. “We are very concerned about our mining operations in the US and the impact this will have on employment in the mining industry and the impact on our trade balance. We wish South Africa would become more vocal,” said Lutley.
Anglogold’s marketing director, Kelvin Williams, said on radio he thought the sale was “wrong in principle”, but it was more likely that market sentiment and speculation would have an effect on the bullion market. At a recent meeting held by the gold producer to announce their quarterly results, he said the market could easily absorb 150 tonnes from the IMF sale over a prescribed period and it wouldn’t be noticed. But he said the view attached to the sale of gold by central banks and the investment sector would surely be blown out of proportion and have a negative effect on the market.
Williams also pointed out that last year the shortfall between demand from jewellery producers and global output amounted to more than 1 000 tonnes – almost seven times the amount the IMF is thinking about selling.
Lutley and the Gold Institute are concerned that the sale of five to 10-million ounces of the IMF’s gold will not only impact negatively on the price of gold – which is already at a 20-year low – but harm rather than help the 41 highly indebted poor countries (HIPC). Many of them are dependent on gold mining for export earnings, and others will be prevented from properly developing an industry that could bring them many benefits.
George Milling-Stanley, gold market analysis manager for the World Gold Council, is also opposed to the IMF sale. He pointed out that the sale of IMF gold would have an adverse effect on the lives of individuals who hold gold all around the world – many as a primary form of savings. And the effect on HIPC and the mining industry as a whole could have far-reaching negative implications. The mere perception of the IMF selling off a portion of its reserves will take some of the shine off the precious metal
South Africa’s position, on the other hand, is stuck between a rock and the gold face. The government can’t be seen to support a move that may not only put jobs at risk, but could also have an impact on the whole economy, especially in an election year. And yet it has an obligation to support its highly indebted Southern African Development Community partners in reducing their astronomical debt burdens. However, Minister of Finance Trevor Manuel has said that if gold sales are the only way to provide debt relief to Africa’s most impoverished nations, they are acceptable – as long as they are done prudently and over a period of time.
But as South African producers are pooh- poohing the sale, a number of economists are not happy about the precedent such a sale is setting. They are concerned that a depressed gold price and continuous selling of gold into the market will set a bad example.
“Any time a country needs money they’ll sell some of their gold reserves,” remarked Mike Schussler, economist at FBC Fidelity Bank. “Any recovery in the gold price will be unsustainable. As soon as gold starts to climb, selling will come into the market,” he added.
Gold has also traditionally been an inflation hedge and a safe haven from turbulent stock markets. But with little inflation and the US Treasury bond the new safe haven, it is no longer a hedge. Gold’s no longer precious – it’s now just another metal.
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