Gold reels after Swiss propose sale of reserves
GOLD's flimsy grip on its ancient role as a financial asset took another blow on Friday when advisers to the Swiss government said the country could sell 1 400 tons of the metal if it abandoned the gold standard.
Changes to the constitution, discussion at government level and a popular referendum would be needed before sales could begin in 1999.
"What this (the Swiss proposal) could do is keep the market in the doldrums for the next 18 months," said a gold market analyst.
"It will also spark the other central banks to thinking 'well, if the Swiss are going to do this in 1999, we'd better get moving now'," he said.
Switzerland is the last developed country to insist on a gold backing for its currency. On November 1 the extent of the backing will be reduced from 40% to 25%.
Debate has been going on in Switzerland since March when the proposal was first announced to revalue gold reserves closer to market value, reduce the franc's backing and sell part of the surplus to generate a humanitarian fund for victims of tragedy such as the holocaust.
The latest proposal came at the end of a week which saw billions of dollars wiped off the value of the world's stock markets following swinging falls in Hong Kong and other major Asian markets.
But a boost for the moribund gold price as it re-established its traditional store-of-value role amounted to no more than a couple of dollars and was short lived.
"The main beneficiaries were the guys in the US bond market. Gold just stood back while they went to the party," one gold observer said.
A bewildered market marked gold down at London's Friday morning fixing to $321.90/oz from $324.30 on Thursday afternoon.
At current market prices, selling 1 400 tons of gold would raise more than $14billion and leave the Swiss National Bank with 1 190 tons of gold in reserves.
Finance Ministry director Ulrich Gygi said: "According to all the experts, there should be no significant, erratic influence on gold prices from a cautious and phased sale."
This brought howls from market professionals. "How can you possibly sell that amount of gold with sensitivity?" asked one irate source.
In the late 1970s the US and the International Monetary Fund (IMF) them sold 1 175 tons over three years.
"There was no major disruption then when the gold market was about half the size it is now," said Rhona O'Connell, metal markets analyst at stockbroker T Hoare and Co.
"Of course market sentiment then was a lot different to what it is now."
Prices have been under pressure for over a year since the IMF announced it would sell 155 tons of its reserves to fill a gap in its fund for supporting poor countries.
The market was horrified even though any likely IMF sale would not be for several years, would be conducted to minimise market disruption and would take place only if the money could not be raised by other means.
An announced 300-ton sale by the Dutch central bank in January, the announcement of Swiss gold reserve rethinking in March followed by a proposed revaluation of Bundesbank reserves all helped keep the market on the defensive.
"The cumulative effect has brought total disenchantment with gold but the market reaction after each announcement has been less than the one before it," said O'Connell. - Reuter.