Ottawa gold selling continues

All that government gold — 12.3 million oz. at the end of March — no longer glitters as it once did.

However, despite depressed prices, there’s still a silver lining in those gold bricks gathering dust in the vaults of the Bank of Canada. The reason: gold is held in the government’s dollar-defence fund of foreign exchange reserves at a book value of about US$48 per oz. or roughly $300 less than its market value. (Gold has been trading below US$340 per oz. of late.) As such, every ounce of gold the government sells reduces the book value of its gold holdings by US$48 but boosts its foreign currency holdings by almost US$350. The difference of about US$300, converted into Canadian dollars, reduces the federal deficit by about $355.

And emptying the vaults, even at current prices, could cut more than $4 billion from this year’s projected $27.5-billion deficit.

Such a massive sale, however, is not in the cards. It would depress prices and hurt an industry which provides work for more than 12,000 Canadians. Canada, with about 60 operating mines and more than $2 billion a year in production, is the world’s fifth largest gold producer, almost all of which is exported.

But a more modest increase in sales would help the government meet, possibly even exceed, its deficit reduction target.

And with an election expected next year, such a painless, sleight-of-hand deficit reduction scheme can’t be ruled out.

The finance department admits gold sales lower the deficit, at least on paper, but claims that’s not the reason for the sales.

“We sell at market prices so there is an accounting gain to the sale of gold,” said the department’s Jon Cockerline. “That’s not why we sell gold, that’s a result of our financial management decision to sell gold.” The idea is to reduce the share of foreign reserves that are held in gold, he said. “It isn’t of any use to us in gold bullion,” he said.

“We’re getting rid of them slowly but surely. We don’t want to disturb markets, of course.”

Because gold doesn’t earn interest and hasn’t been used to back the value of currencies for two decades, other governments are also reducing their gold holdings.

But many have also revalued their gold holdings to reflect its market value and as such gain no bookkeeping advantage from sales.

One gold investment dealer who suspects politics rather than prudence may be fuelling sales is Jonathan Goodman, manager of Dynamic Fund Management Ltd. “It appears to me that they’re just trashing the gold market,” Goodman said. “They sold more gold in the last three months of last year than they did in the rest of the year,” he said, adding that the sales surge continued through January and February.

“Its potential gain from sales of three million oz., and a corresponding reduction in the federal government’s deficit, is $1 billion,” he said. It would make more sense, however, to hold on to the metal and wait for prices to rise, which they will, he added.

“It’s straight supply and demand,” he explained.

Among other things, world production is at a peak and demand for gold for jewelry has been outstripping production for several years, he said. The Canadian government’s lack of interest in gold, however, stretches back at least three decades.

Ottawa hasn’t bought any gold since at least the 1950s, at which time purchases were made to support the industry.

And for the past decade Ottawa has steadily reduced its gold holdings with small monthly sales.

At the start of the 1980s, the government held 22 million oz. while in the mid-60s it held 33 million oz.

At its peak, gold made up about 80% of the government’s dollar-defence fund of foreign currencies, mostly U.S. dollars, and gold. It now accounts for just over 20%.

The government feels that’s too high, said Cockerline, “so we’re bringing it down.”

— Southam News.