Gold sell-off proves to be expensive misreading

from the West Australian

The Reserve Bank of Australia’s controversial decision to sell two-thirds of its gold reserves nearly 12 years ago has robbed it of nearly $5 billion.

As gold prices yesterday closed at $US856.25 an ounce, WestBusiness calculations showed that the 167 tonnes the RBA sold as part of a shake-up of its international reserves in 1997 would have been worth $7 billion.

At the time it pocketed about $2.4 billion, with gold trading between $US332/oz and $US416/oz.

The RBA shocked world markets and enraged the gold industry in July 1997 when it revealed it had dumped the bulk of its gold reserves.

The decision sent prices tumbling to $US315/oz as then-Federal treasurer Peter Costello argued that gold no longer played a significant role in the international financial system.

Both the RBA’s decision and Mr Costello’s comments drew angry responses from many senior industry figures, who claimed the comments had done more damage than the sale itself by fuelling an atmosphere of uncertainty.

While the RBA’s sale followed similar moves from European central banks, it also triggered another wave of selling, with the Swiss central bank offloading half of that country’s gold reserves and abandoning the gold standard.

One of those critical of the decision at the time was mining veteran Ed Eshuys, then Joseph Gutnick’s right-hand man and now the outgoing chief executive at St Barbara.

Twelve years and a near trebling of the gold price later, Mr Eshuys yesterday conceded a certain degree of schadenfreude at the RBA’s missed opportunity.

“The issue was that Australia was the third largest gold producer at the time and for the Australian government to sell out its gold holdings, particularly in that climate, gave all the gold buyers some food for thought,” he said.

“I don’t know if it precipitated it or it was a catalyst, but the gold price kept falling from then on. (The comments) certainly didn’t help.

“Exploration stopped after that — 1997 was the peak for exploration and after that it declined.”

An RBA spokeswoman said yesterday the central bank’s policy had not changed since it decided to readjust the percentage of reserves held in bullion in 1997, justified at the time as a move towards diversification. She said the bank had no intention of selling its reserves down any further.

The global financial crisis has seen gold prices soar over the past 12 months, with spot gold topping $US1000/oz last year and consistently trading at a historical high in Australian dollar terms.

Gold’s bumper performance has boosted the value of the RBA’s remaining 80 tonnes of gold from about $2 billion in June 2007 to around $3.3 billion.

According to World Gold Council figures, RBA vaults held 79.8 tonnes of gold as of December, making up about 6.3 per cent of its total reserve, compared to an international average of 10.2 per cent.

In the European Union most governments hold more than 50 per cent of their reserves in gold, while in the US it was as high as 76 per cent in 2008.