Wise men choose to sell down gold

The reputation of the world's bankers has taken a few knocks in the months since the subprime crisis blew up. Even so, there are still some whose reputations command widespread respect in financial circles. Andrew Crockett, Mohamed El-Erian, Alan Greenspan, Tito Mboweni, Guillermo Ortiz, Hamad Al-Sayari, Jean-Claude Trichet and Zhou Xiaochuan belong to this select group.

The name of Alan Greenspan, boss of the US Federal Reserve from 1987 to 2006, will be familiar. The others are less well known, although they are scarcely less illustrious.

Mr Crockett is president of JP Morgan Chase International and ex-boss of the Bank for International Settlements. Mr El-Erian is chief investment officer for Pimco, the world's biggest bond investor. Mr Mboweni is governor of the South African Reserve Bank. Mr Ortiz steered Mexico out of the 1994 tequila crisis. Mr Al-Sayari has headed the Saudi Arabian Monetary Agency for the past 25 years. Mr Trichet is boss of the European Central Bank, and Mr Zhou is governor of the People's Bank of China.

These worthies came together a while back to try and find a new source of income for the International Monetary Fund, which is running short of cash. Their answer was to propose selling some 400 tonnes of the fund's gold holdings, and to reinvest the money in assets which actually generate a return.

This is an eminently sensible solution to the fund's problems. The price of gold has soared spectacularly in recent years on the back of a speculative boom (see chart), but that is no good to the IMF. Its 400 spare tonnes is merely gathering dust at vast expense in its vaults, while the fund expects to suffer an income shortfall of US$200 million this year.

On the other hand, the IMF's eminent advisers calculate that by selling the gold and investing the proceeds in high-grade income-generating assets the fund could both preserve the value of its capital and earn an excess return of just over US$200 million, enough to cover its projected deficit for 2007.

The trouble is that the IMF is not alone in wanting to unload its gold. Many of the world's central banks have also come to the conclusion that bullion is an expensive waste of space, and have determined to sell down their holdings if they can. Hong Kong, for example, sold five of its seven tonnes of reserve gold back in 1993.

Altogether in the past 10 years the world's central banks have managed to sell about 4,000 tonnes into the rally (see chart). But that leaves them still holding about 30,000 tonnes, much of which they would dearly like to get rid of.

It will not be easy. With the entire production from all the world's mines amounting to just 2,000 tonnes a year, the remaining stocks of reserve bullion are equal to 15 years of new supply. Any large official sales would send the price into free-fall.

To avoid undermining the value of their holdings, European central banks and the IMF have agreed collectively to sell no more than 500 tonnes of gold a year. That deal has helped to support the price. But the speculators who last year bought 400 tonnes of bars and coins and a further 250 tonnes through gold funds might do well to wonder why they are so keen to buy gold when the wise and worthy of the financial world are busy selling.