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Italy's aborted gold sales

Italy wants to sell gold to pay its debts. The ECB says no...

SALES OF GOLD by European Central Banks are primarily for the adjustment of national reserves in terms of structure or size. They are not intended – according to the rules of the European Union – to pay the bills of government.

   So when the subject came up in early August, after the Bank of Italy had consistently refused to even contemplate selling the country's gold reserves, everyone was surprised. The reality, however, was suddenly that the government of Italy wanted to put their hand into the country's coffers. And this exercise would never have solved the country's debt problems anyway.

   The Italian parliament approved a reserve plan allowing the government to look into using the Bank of Italy's substantial gold reserves to cut the country's huge national debt. Italy has some 62% of its foreign exchange reserves value in gold, about 2,452 tonnes. The resolution inserted into Italy's next budget committed the government to:

   "Undertake, also in its relations with the European Union, a survey of all instruments useful to producing a significant reduction of the national debt, through agreed ways of using the reserves of the central banks, in gold and currency, in excess of that required by the agreement with the European Central Bank [ECB] for the defence of the Euro."

   The wording suggested that Italy's government would try to re-think at EU level the existing limitations on the use of the gold and currency reserves of Europe's central banks. This was bound to ruffle the feathers of the ECB!

   The government's plan aimed to cut Italy's debt to 103.2% of gross domestic product in 2008, down from 105.1% of GDP this year, using the central bank's gold and foreign exchange reserves to raise cash. Italy would have achieved this target if it sold 1,740 tonnes of its gold, but this would take four years under the 'ceiling' limitation of 500 tonnes allowed by the current Central Bank Gold Agreement (CBGA). This agreement may be renewed again in 2009, but even then, the Italian parliament's plan would require that Italy was the only gold seller in Europe, and no doubt Italy's debt would have risen past the present level regardless.

   This achievement undoubtedly would have been swamped by the underlying problems in the Italian economy within a smaller period of time. Italy's debt is the world's third highest in absolute terms. The gold sales plan was unlikely to change that.

   Was the Italian plan reasonable? Not at all. Italy has had a very long record of poor management of its currency. One of the saving graces is that it had the wisdom to hold large gold reserves in case the record continued, with gold always there to bail them out of the mess. The Italians could have undertaken sales of gold after Budget Day 2008, once the Italian government had approved their next year's spending plans. There was room though for gold sales, under the present agreement, for around 370 tonnes in the last two years of the agreement, which runs through until September 26th 2009, but no more. This would have made the exercise pointless.

   It appears old-fashioned now to think that national spending behavior should be limited to stop the bleeding, with repayment of debt then undertaken from new income. In high debt situations the sight of gold reserves in Europe – except in Germany – seems impossible for politicians to resist. Add to that a complete lack of understanding of gold as savings for a rainy day, and you get another repeat of governments grabbing the piggy bank.

   Wisely, the Bank of Italy kept silent, because the plan crossed the lines of the Maastricht Treaty and impinged on European Central Bank territory. It is up to the European Central Bank (ECB) to put the Italian government in its place. Italy's approach was not solely an attack on gold reserves, but an attempt to adjust the policies of the Eurozone and interfere in the activities of the ECB.

   The European Commission was also sharp in its response on the use of the Bank of Italy's gold reserves to lower the country's debt, saying that "It is up to the ECB to decide about the foreign reserves (including gold reserves) of the Euro area member states, in full independence."

   Did we detect more than just a re-establishment of the order of financial seniority here? In these days, when the composition of reserves is becoming a sensitive issue again, with the importance of gold in extreme times rising in the face of a weakening Dollar and shaky credit markets, we would certainly hope so.

   The matter is now put to rest, leaving a substantial shortfall in the 'ceiling' of gold sales for the entire Central Bank Gold Agreement (some 2,500 tonnes) and the balance of announced gold sales to date short of that by around 400 to 500 tonnes. For the entire report, please subscribe to

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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