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Spain’s record gold sales

Spain's central bank has sold 80 tonnes of gold to cover its trade deficit...

Global Watch: 24th May 2007
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THE BANCO de España has sold €13.2 billion – some $17.7 billion – of its foreign currency and gold reserves. That's equal to 12 days of Spain's current imports, according to the Bank's website.

   And last week their gold sales continued, possibly hitting between 10 and 15 tonnes or more.

   During the last two months alone the Banco de España has sold off 80 tonnes of gold. It has also reduced its holdings of US Treasuries, British gilts and other investments at a similar rate. Total reserves have now fallen by two thirds from €41.5bn in early 2002. Greece and Portugal have seen a similar drop.

   The Banco de España refuses to comment on these sales. Nor will it say why it's pursuing a policy of spending Spain's savings when they could have used other means to cover the trade deficit – which has now ballooned to 9.5% of GDP, reaching €8.6bn in January alone (some $11.6 billion).

   It appears that Spain's current account is completely out of control. Spain has the worst deficit in its history, worse than any other country in the Western world. Should Spain face any form of banking crisis, the country will find it nearly impossible to handle.

   Should a housing slump occur, for instance, a banking crisis is likely to follow. And the first signs of a housing slump are now emerging.

   Part of the Eurozone bloc, Spanish interest rates have already risen seven times to 3.75% since Dec. 2005. The shares of Valencia builder Astroc have fallen 77% since Feb. this year, setting off a sharp slide across the sector. The knock-on effects are hitting banks with mortgage exposure.

   It had been assumed that currency reserves would no longer matter to member of the Euro. But that would ignore a crucial element in the workings of the European Monetary Union system. Each of the 13 national banks still has to act as lender of last resort in a crisis, even though they have no control over interest rates.

   How serious could Spain's banking problems become? Its private sector has amassed the equivalent of $600 billion in foreign debts. Corporate borrowing is 100% of GDP. The overall stock of mortgages has increased six-fold in a decade. Household debt has reached 120% of disposable income, largely on floating rates. Morgan Stanley says construction now accounts for 17.7% of GDP – even higher than the 15% peak reached in Germany after reunification. That boom-bust story left the German banks emasculated for years.

   Japan was able to uphold its banking system in the post-bubble slump of the early '90s because the government could guarantee deposits. But you can't do that in the Eurozone; there is no government to turn to. Each country is on its own when it comes to reserves.

   That is why the overall reserves of the Eurozone system have remained stable. France retains €76 billion, Germany €86 billion, Italy €59.5 billion – and they have all kept their holdings at these levels since the launch of the single currency.

   The European Central Bank (ECB) may only intervene if a crisis spreads across the Eurozone. Indeed, it is forbidden from bailing out an individual member state. The International Monetary Fund warns that this structure leaves European Monetary Union exposed to "systemic financial risk". So foreign currency and gold reserves are a key defense for each member state. That explains the Eurozone rule that national banks retain the lion's share of reserves. The ECB has a token 13%.

   At the moment, to be fair, Spain looks in fair condition:

  • Growth hit 4% in the first quarter;
  • The budget surplus is 1.8% of GDP;
  • The export share is holding up;
  • But house prices have nearly tripled since 1995.

   A law to control property speculators has been passed in Madrid. Now house price growth has clearly peaked and is decelerating quickly.

   The government cannot devalue its way out of trouble, so it will have to deflate. And the irony is that gold has its greatest value after a crisis has exploded, not just ahead of it.

   Will we see more sales of Spanish gold? These are not simply sales to adjust reserves – the stated reason for Eurozone banks selling gold. Spain's 80-tonne sales are because Spain is headed for difficult days.

   Let’s see how much more gold will be sold to pay the bills.

   Please visit for the entire report...

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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