"THE EXCHANGE EQUALISATION ACCOUNT’S HOLDINGS OF GOLD
- The EEA’s holdings of gold, including the gold swapped for ECU’s with the EMCF, amounts to 23.8 mn ozs, or some 740 tons. Since the substantial reduction in stocks in the late 1960’s and early 1970’s resulting from the then balance of payments’ crises, there has been no significant change in holdings. At the annual revaluation of the reserves in March 1988, the gold holdings were worth $8.1 bn. However as a share of total reserves they have fallen significantly from 31 per cent in 1980 to 17 per cent of total spot reserves now. Table 1 shows the change.
(c) Gold in the international monetary system
11. After the collapse of the Bretton Woods system and the abolition of the fixed parities between domestic currencies and gold, the international monetary community decided in principle to remove gold from the international monetary system. Until late 1978 central banks understood not to add to their gold stocks, and the IMF and the USA reduced their gold holdings through auction.
12. However, the move to eliminate gold never gathered much momentum, and has now petered out. The European Monetary System (EMS) has given gold something of a new role in international monetary affairs. Gold deposited with the EMCF can be used to obtain currency through the ECU mobilisation process or (were we in the exchange rate mechanism (ERM) through the use of official ECUs themselves). However, EMS membership (or for that matter, ERM participation) does not constitute an overwhelming ground for maintaining present gold holdings, though ECU mobilisation, within limits, makes gold deposited with the EMCF more liquid.
13. [The mechanism for creating ECUs through the EMCF works on both gold and dollar deposits, so that to the extent that gold was replaced by dollars, the EMCF’s capacity to create ECUs would not be affected. Furthermore, the logic of the system is that an identifiable Community asset is created against the deposit of non-Community reserve assets, namely dollars and gold. There is no reason in logic why EMCF members should not deposit 20 per cent of their reserves in non-Community currencies other than dollars as well, eg. Yen and Swiss Francs, if it is desirable to increase the scale of ECU creation or to compensate for reductions in gold deposits.]
14. Looking forward over the longer term, it is possible that if moves towards more managed rates continue, there will be renewed attempts to restore gold to a more formal role as a reserve asset. It was interesting to note the amount of speculation along these lines in the US last Autumn, following Secretary Baker’s proposal for a commodity indicator (including gold), even though Secretary Baker was at pains to make it clear that he was not advocating a commodity standard. However, the probability of this happening is not sufficiently high to justify the UK retaining its gold stocks on these grounds alone.
15. Gold is therefore left with something more than a residual function. Its possession is likely to increase confidence in the holder’s currency, at least in times of difficulty; and although it is illiquid compared to many financial assets, and expensive to store, in most circumstances it can be used as security for borrowing or to obtain currency through swaps.
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