By Reuters | 11 Apr, 2013, 07.57PM IST
A European Commission assessment of what Cyprus needs to do as part of its European Union/International Monetary Fund bailout showed Cyprus is expected to sell in excess gold reserves to raise around 400 million euros ($523 million).
Other struggling euro area countries may be pushed to take note. Between them, for example, Portugal, Ireland, Italy, Greece and Spain, hold more than 3,230 tonnes of gold between them, worth nearly 125 billion euros at today's prices.
The lion's share of that - 2,451.8 tonnes - belongs to Italy. But Portugal and Spain also hold hundreds of tonnes and gold is currently trading around $1,558.95 per ounce in spot terms, or 1,189 euros.
The metal makes up more than 90 per cent of Portugal's foreign exchange holdings, and 72.2 per cent of Italy's. India, by contrast, holds less than 10 per cent of its reserves in gold.
Gold sales on their own would be far from a magic bullet to solve euro zone financing problems: Italy's entire gold reserves, for example, are worth less than 95 billion euros, against outstanding debt of around 1.685 trillion euros.
But the Cyprus situation shows that even a relatively small gold sale may help address severe debt problems. Cyprus' gold sale would allow it to easily come up with around 3 per cent of what it must contribute to the bailout.
It is something that has the market somewhat concerned given that a big sale would push down the price. Central bank gold buying was one of the few areas of demand to increase last year at a time jewellery, coin and gold-bar buying was on the wane.
Indeed, spot gold posted its biggest one-day drop in nearly two months on Wednesday after news of the planned sale broke.
"Cyprus may be a one-off, (but) the market's concern will be that it isn't, and that other countries will be invited to sell their gold," one senior gold trader said.
"It's a potential game-changer for the market," he added. "Given we know that Portugal rejected the most recent austerity plan, and they have over 90 per cent of the country'sforeign exchange reserves in gold, does this mean that Portugal perhaps will be asked to sell some of its gold?"
PROHIBITION
Despite this, potentially hefty barriers lie in the way of central banks making sales to meet financing needs. Article 7 of the Protocol of the European System of Central Banks, for instance, guarantees central bank independence and freedom from government influence.
In other words, if a central bank doesn't want to sell its gold, in theory it can resist.
The European Central Bank issued an opinion against an Italian government proposal to levy a 6 per cent capital gains tax on the central bank's balance sheet, apparently including its gold holdings, in 2009.
No comments:
Post a Comment