World demand for gold expands

Interest in gold, among central banks, has rarely been so high. This is because the price of gold is approaching US$400 per oz. and because of the mobilization of gold (gold loans, options, etc.) by several central banks in recent years.

The expansion of world demand for gold derives in part from changing international economic conditions, particularly the transformation of developing countries from closed economies with rigid tariff barriers and large budget deficits to open economies with deregulation.

Last year, the gross domestic product (GDP) in the developing world grew by 6%, as opposed to 1% in the industrial world. According to the International Monetary Fund, GDP in the developing world was about US$7 trillion out of a world GDP of about US$22 trillion. If one calculates a 6% growth on a GDP total of US$7 trillion, an increase of more than US$400 billion is evident, compared with an increase in the industrial world of US$120-150 billion. A similar trend will prevail in 1994, with the exception that the U.S. should show more robust growth than in continental Europe and Japan where growth will be about flat. Overall, growth in the developing world will be more than twice that of the industrial world. This means that more money will be created in the developing world, giving these countries the ability to spend money on jewelry and other consumption goods, not least those made of gold. A similar pattern is evident in central bank trends. Central bank reserves have been flat overall in the industrial world, whereas in the developing world they have been rising; and as they rise, the opportunity to buy new reserve assets, such as gold, also rises.

Finally, a new wave of independent central banks has helped hold down inflation in many developing countries. In fact, in most countries that have changed their central banking law, it has become illegal for the central bank to provide financing of the budget deficits. This trend toward independence has led to a more significant role for central banks in the management of reserves. This brings gold, among other assets, back into play. — This article is a summary of a presentation given at the Central Bank Workshop, held in New York Jan. 20 and sponsored by the World Gold Council. Geoffrey Bell is president of Geoffrey Bell and Company, which advises several central banks and governments on the investment of their international reserves.