In June, the Swiss announced they would be selling 250 tons of gold over the next two years. A few weeks earlier, the European Central Bank disclosed that it had sold gold. (See the June 14 and June 5 blog posts.) Now, the Italian Parliament has issued a resolution calling for the Bank of Italy, the Italian central bank, to sell some of its reserves and use the proceeds to reduce the country’s national debt. Immediately, of course, the media reported that Italy was going to sell gold.
A closer review of the resolution, however, reveals that Parliament called for the sale of “reserves,” which also includes dollars, British pound sterling, Swiss francs and Japanese yen. Yet the media chose to talk about “Italian gold sales.” The Italians could be selling dollars as well.
Additionally, a Financial Times article, presumptuously titled Italians to use gold reserves to cut national debt, noted that the Italian central bank, under European Union membership rules, is autonomous. The central bank may not agree with selling its reserves to cover deficits incurred by a profligate Parliament. In February 2006, Germany’s central bank effectively blocked the German government’s proposals of selling gold to fund research and development projects.
The idea that Italy may sell gold is readily accepted because of current thinking about gold. To many economists, gold is an “18th century” anachronism. Few economists understand, and fewer accept, the classical theory of money, and today they consider computer entries to have value equal to, or greater than, gold, which has had value in civilizations. Computer-entry money, of course, has no intrinsic value.
Still, it must be recognized that the Italians may sell. In recent years, France, Holland and Germany have sold some of their central banks’ gold.
Would any Italian sales significantly impact the gold market? If so, the sales will have to be in the next few weeks.
Under the Central Bank Agreement on Gold, of which Italy is a signatory, fifteen European nations have agreed to limit gold sales to 500 tons a year. For 2008, 345 tons have already been reserved by other signatory banks, leaving only 155 tons open to the Italians in 2008.
However, this CBAG year, which ends in two months, is 145 tons short of the 500-ton annual cap. Considering the pace at which bureaucratic wheels turn, it is unlikely that any Italian gold will be sold under this year’s CBAG. If no other European central banks report additional sales in the next two months, signatories to the CBAG will fall short of hitting the 500-ton annual cap two years in a row. Last year, sales under the CBAG were 100 tons short of the 500-ton cap. Perhaps, reduced gold sales under the CBAG suggest that even central banks are beginning to see the need to own gold.
And, that seems to be the gold market’s view, with no sell-off on the news.