The Euro, The Dollar and Gold

Conference on Gold:The Euro, the Dollar and Gold

Co

nferen

ce on

Go

ld: Th

e Euro

, the D

ollar an

d G

old

, Berlin

Novem

ber 2001

Proceedings of the Conferenceheld in Berlin16 November 2001

WORLD GOLD COUNCIL

1

:

Challenges for Europe: the

euro, the dollar and gold

Proceedings of the

conference held in Berlin on

16th November 2001

2

The views expressed in this study are those of the conference participants and not nec-

essarily the views of World Gold Council. While every care has been taken, World Gold

Council cannot guarantee the accuracy of any statement or representation made.

World Gold Council

45 Pall Mall

London SW1Y 5JG UK

Tel + 44.(0)20.7930.5171

Fax + 44.(0)20.7839.4314

E-mail: [email protected]

3

Contents

Foreword by Haruko Fukuda ........................................................... 5

List of speakers .......................................................................... 7

Challenges for Europe

Introduction by Benedikt Koehler ................................................... 10

The outlook for the international monetary system

Hans Tietmeyer ......................................................................... 13

The benefit of the euro for neighbouring countries

Krzysztof Majczuk ...................................................................... 23

Questions ................................................................................ 27

Gold in Eastern Europe


The contribution of the EBRD to mining in Eastern Europe

Mark Rachovides ........................................................................ 32

The role of gold in Russia’s reserve management

Vladimir Sokolov ........................................................................ 38

The role of gold in Kazakhstan’s reserve management

Batyrbek Alzhanov ...................................................................... 43

Questions ................................................................................ 46

The role of gold in the international monetary system

Introduction by Dick Ware ............................................................ 51

The future of the euro, the dollar and gold

Robert Mundell .......................................................................... 53

The BIS and gold

Giacomo Panizzutti ..................................................................... 62

External reserves in the IMF’s quota formulae

Michael Kuhn ............................................................................ 69

Questions ................................................................................ 75

Gold in the 21st century


Gold - an industry insider’s view

Rex McLennan ........................................................................... 80

Why everybody should own gold

Robert Weinberg ........................................................................ 87

Closing remarks

Robert Pringle ........................................................................... 97

5

Foreword

On the eve of the introduction of euro notes and coins on 1 January 2002, the

World Gold Council held a conference in the Palais am Festungsgraben in Berlin

on 16th

November 2001 entitled Challenges for Europe: the euro, the dollar and

gold. This was the third in the series of conferences devoted to public policy

issues surrounding gold as a reserve and monetary asset - the previous conferences

having been held in Paris in 1999 and Rome in 2000.

The conference addressed some of the important issues surrounding the future

of the euro and the continuing role that gold could play in the international

monetary system. In view of the impending enlargement of the European Union,

the conference also discussed attitudes to gold as a monetary asset in eastern

and central Europe.

Krzysztof Majczuk, from Poland’s central bank, had no doubt gold had a future

as a monetary asset. “Poland is especially attached to gold,” he said, adding

that the name of its currency, zloty, means gold in Polish. Vladimir Sokolov of

the Central Bank of Russia stressed the value of gold reserves in rehabilitating

his country’s financial system, while Batyrbek Alzhanov, director of Monetary

Operations department, National Bank of Kazakhstan spoke of how gold as a

reserve asset offers protection from the vulnerabilities of holding the securities

of foreign states.

Former Bundesbank President Hans Tietmeyer and Nobel Laureate Robert Mundell

spoke on role of reserve assets and currencies and the outlook for the international

monetary system. Finally, Dr. Robert Weinberg of the World Gold Council

introduced a new element, the role of gold in institutional investment. The

management of gold holdings among professional investors in some ways mirrors

the portfolio management of central bank assets. In raising interest in gold

investment in the private sector the World Gold Council seeks to demonstrate

the metal’s versatility in portfolio diversification and its role as the ultimate

store of value.

The World Gold Council is pleased to present all these speeches, among others

given at the conference, in this volume.

The World Gold Council would like to thank all speakers and participants for

their contribution to the success of the conference.

Haruko Fukuda

Chief Executive Officer

7

List of speakers

Krysztof Majczuk

Born in 1951, Krysztof Majczuk has been Director of the

Foreign Exchange Department and a member of the

Board of the National Bank of Poland since 1997. Majczuk

has graduated from the Nicolaus Copernicus University

in Torun, where he received a master’s degree in law.

He has been working for the National Bank of Poland for

25 years and has been involved in various areas of bank-

ing activity. Today he is responsible for managing the

official reserves held by the National Bank.

Batyrbek Alzhanov

Batyrbek Alzhanov, born in 1964, has been the Director

of the Treasury Department of the National Bank of

Kazakhstan since 1997. He started his career with this

institution as an economist at the Foreign Exchange Di-

vision. Having worked for the Turan Bank in the posi-

tion of Deputy Chairman in 1996, Alzhanov returned to

the National Bank of Kazakhstan in 1997.

Rex McLennan

Rex McLennan was appointed Executive Vice-President

of Placer Dome in 1998. Placer Dome, with its head-

quarters located in Vancouver, Canada, is one of the

leading gold producers worldwide. McLennan is respon-

sible for Placer Dome’s overall financial strategy and is

in charge of various departments. After his MBA in Fi-

nance and Accounting in 1979 McLennan pursued a ca-

reer with Imperial Oil (Exxon Corporation) for twelve

years before he joined Placer Dome in 1991.

Benedikt Koehler

Benedikt Koehler is Manager, Official Sector Europe at

the World Gold Council. His publications include a bi-

ography of the founder of the gold standard in Germany

Ludwig Bamberger (Deutsche Verlags-Anstalt, 1999).

8

Robert Mundell

Born in Canada, Robert Mundell is University Professor

of Economics at Columbia University, New York. Be-

sides his distinguished academic career, Mundell has been

a consultant to the World Bank, the United Nations, the

US Treasury and the Federal Reserve Board. Mundell

has been the recipient of a number of awards and

honarary doctoral degrees and is fellow of the Ameri-

can Academy of Arts and Sciences. Mundell received

the Nobel Memorial Prize in Economics in 1999.

Giacomo Panizzutti

Born in 1946, Giacomo Panizzutti is global head of for-

eign exchange and gold with the Bank for International

Settlements (BIS) in Basel. He is responsible for all mar-

keting and trading activities with central and commer-

cial banks worldwide. Panizzutti holds a diploma from

the Swiss Commerce Academy. In 2000 he received the

distinguished Leadership Award from the New York Mer-

cantile Exchange for his outstanding contributions to the

precious metals industry.

Robert Pringle

Robert Pringle is Corporate Director for the Public Policy

Centre of the World Gold Council. He has pursued a

career as an economics editor, publisher, author and con-

sultant specialising in international trade, banking and

capital markets, and is the founder of Central Banking

Publications, publishers of a range of journals and direc-

tories on international monetary subjects. He is the au-

thor of numerous publications on international monetary

subjects and has served as a member of the World Gold

Council’s Advisory Boards since 1991.

Mark Rachovides

Mark Rachovides has been a Principal Banker at the Euro-

pean Bank for Reconstruction and Development (EBRD) in

London since 1996. He is currently involved in the Natu-

ral Resources Team and is working on a variety of oil and

gas mining projects in the former Soviet Union and in

Eastern Europe. He leads the EBRD’s financing of two

major gold projects, both syndicated to commercial banks.

He has also written articles and made presentations on

Russian gold mining. He has an MA from Oxford Univer-

sity and has 17 years’ experience in commercial banking.

9

Vladimir L Sokolov

Vladimir Sokolov has been Director of the International

Monetary Department at the Bank of Russia. He is re-

sponsible for developing and implementing the Bank of

Russia’s policies in external reserves management and

the Rouble exchange rate. Sokolov graduated from the

Economics Department of Moscow University and joined

the Bank of Russia as a dealer in the domestic currency

unit.

Prof Dr Hans Tietmeyer

Born in 1931, Hans Tietmeyer joined the German Fed-

eral Ministry of Economics after completing his disserta-

tion. In 1973 he became Director of the Department of

Economic Policy. In 1982 he joined the Ministry of Fi-

nance to become Secretary of State. From 1990

Tietmeyer was a board member, and from 1993 to 1999,

President of the Deutsche Bundesbank. Since 2000 he

has ben chairman of the initiative “New Social Market

Economy”.

Dick Ware

Dick Ware is manager of the Public Policy Centre of

the World Gold Council. His primary responsibilities

are in respect of official sector gold holdings. He also

works with the Council’s regional offices to foster the

deregulation of gold markets worldwide. Apart from

a three-year spell at the National Westminster Bank

as Director of Compliance, the majority of Dick Ware’s

working life prior to joining the World Gold Council

was spent at the Bank of England, where he specialised

in international financial relations, with a secondment

Rob Weinberg

Rob Weinberg is head of the global Institutional Invest-

ment programme of the World Gold Council. After gain-

ing his doctorate in geology at Oxford University,

Weinberg joined the Anglo American Corporation in South

Africa. In 1985 he moved to London to join the interna-

tional mining team at a firm of London stockbrokers, as

a mining and gold analyst.

11

Challenges for Europe; the euro, the dollar

and gold

Good morning, Ladies and Gentlemen. The World Gold Council is delighted to

welcome you and I am looking forward to today’s speakers who will provide us

with many new insights.

Today’s conference sequels events the World Gold Council has held before in

Paris and in Rome. When deliberating where we would hold this year’s confer-

ence we decided on Berlin for two important reasons. One is that we are only a

few weeks away from the introduction of notes and coins in the Eurozone. Then,

the world’s youngest currency will become tangible. We have noted this year the

immense popularity of a gold coin issued to commemorate the Deutsche Mark,

the legacy currency of this country. Subsequently we have heard the announce-

ment by the German Ministry of Finance of the issuance of a golden coin next

year to greet the advent of the world’s youngest currency. We thought it would

be very fitting to build a bridge between the world’s youngest currency and the

world’s oldest currency and where better to host this conference than in Berlin?

The location of this conference matters. Here, today, we are convening in East

Berlin, and by walking from the hotel to the conference centre, the Palais am

Festungsgraben, we have been traversing what was formerly an area behind the

Iron Curtain. It’s hard to imagine now, considering the reconstruction that has

been taking place in the last ten years of Berlin’s building boom, but in 1945 this

building was the only one in the immediate neighbourhood which had been un-

damaged by bombs. In view of the importance which East Germans ascribed to

their friendship with Russians, this building was dedicated as the House of German/

Soviet Friendship. If you have the time to look around, you will see on the medallions

painted on the ceiling portraits of the heroes of Soviet realism. The sculptures in

this room are those of Maxim Gorky and of the great Jewish writer Heinrich Heine.

In the last decade, things have changed once again. Now it is far easier to travel

here than it was before. The important point is that Eastern Europe and Western

Europe have grown together and today are very close. In today’s conference we

have the benefit of hearing the views of our neighbours in the East and hear how

they use gold as a reserve asset. This will be an important part of the conference.

Our conference is divided into four sessions with ten speakers. The first session

is about the euro as it is seen from within the Eurozone. A speaker from a

neighbouring country, Poland, will give his outlook for the next few years follow-

ing conclusion of monetary union in the Eurozone.

Session Two then takes us further into Eastern Europe. Speakers from the Euro-

pean Bank for Reconstruction and Development, from Russia and from Kazakhstan,

Introduction by Benedikt Koehler

12

will provide new information about gold in Eastern Europe. Later on we will hear

about gold in the international monetary system. Finally, there will be a con-

cluding session, which I’m sure everybody cannot help but be interested in:

what does gold mean as an investment asset?

Let me now turn to session one and introduce our first two speakers: Professor

Tietmeyer and Krzysztof Majczuk. Many of us have travelled great distances to

come here and we tend to think of Poland as a country which is very distant.

This may be true from an economic point of view. Geographically, however, Mr

Majczuk had to travel far less than many of us here today. The Polish border is

only about 100 miles east from here. We’re delighted to hear Krzysztof Majczuk’s

view on the introduction of the euro, and what it means for his own country.

Before, we have Professor Tietmeyer, who I think needs no introduction; he is one

of the architects of the European monetary reforms we are witnessing today.

This building, before it became the House of German/Soviet Friendship, served

as the Ministry of Finance of Prussia. One of the important Prussian reformers of

finance was Freiherr vom Stein, commemorated today in a society named in his

honour. The Freiherr vom Stein Society has as its President, Professor Tietmeyer,

who is here to address us this morning. Herr Professor, we’re delighted to see

you here.

13

Opening Address:

The Outlook for the International Monetary System

Prof. Dr. Hans Tietmeyer

Sometime President

Deutsche Bundesbank

Thank you very much for that nice introduction. I can only tell you that I have

taken over the Chairmanship for the Frei Herr von Stein Society from the Federal

President Rau. He asked me to take it over so I’m his successor in this capacity.

But today I would like to speak about the outlook for the international monetary

system, and before I will go into the international monetary system, I would like

to make some comments on the present situation of the world economy.

I.

The world economy is currently going through a difficult transitional period.

The extremely strong growth in the United States during the nineties slackened

markedly in the course of the past year. That slowdown was caused by the burst-

ing of the bubble in the financial markets and the pronounced changes in the

ratings of large parts of the so-called ‘new economy‘.

The perceptible slackening of growth in the United States has meanwhile also

impinged on most emerging economies in Latin America and Asia. Only China,

India and, to some extent, Australia have apparently been relatively little af-

fected, while, sadly, the major industrial country, Japan, is still suffering from

its unresolved structural problems, and has been teetering on the brink of a

recession for some while.

However, Europe is likewise distinctly hard hit by the global slackening of growth

– not only western Europe, but also most of the transition economies of central

and eastern Europe. The distinct moderation of growth in the EU owes some-

thing not only to decelerating foreign trade, the extremely steep increase in oil

prices at times, and the pronounced adjustments in the financial markets; espe-

cially in some of the larger euro-area countries, numerous unresolved structural

problems are curbing the inherent momentum of their economies.

This overall picture, which was becoming plainer and plainer in the first half of this

year, has deteriorated even further since the terrorist attacks of September 11 in

New York and Washington. Besides the direct effects on the financial markets

(particularly insurance companies), airlines and tourism, additional uncertainties

have arisen with regard to the response of the US consumers. It is to be hoped the

14

new uncertainties will not have any lasting effects and will not unduly delay the

new upswing, especially in the United States, that was originally expected for this

autumn. Any lengthy period of uncertainty might well increase the risk.

At present, however, nobody can predict precisely when the turnaround expected

in the next few years will start, and how strong it will be.

At all events, convincing indicators of a new upswing are not visible so far,

neither for the US economy nor for Europe, not to speak of Japan and the emerg-

ing economies.

A new growth process at an early date would be highly desirable, it must be said.

And yet – especially in Europe – it cannot be achieved by means of a short-lived

policy of stimulation. What is possible, and makes good sense, in the United States

on account of the flexibility of business activity there and the advanced state of

budget consolidation might well turn out to be counterproductive in Euroland.

New economic momentum in the euro-area calls primarily for new confidence in

the future. And that can be built up, on a lasting basis, only by means of convinc-

ing reforms, especially in the larger euro-area nations. By contrast, major short-

term public spending programmes, like monetary policies that fail to take ac-

count of the need for stability, might jeopardise the requisite confidence in the

future. The Japan fall into a liquidity trap should not be disregarded.

Hence I don’t think there is any short-term ‘patent remedy’ – at least in Europe

– for overcoming the current sluggishness of growth. In particular, our new cur-

rency, the euro, needs sustained confidence, and that implies a stability-ori-

ented and reform-oriented policy geared to the longer term.

II.

At the beginning of 1999, eleven EU countries (twelve in fact, after the acces-

sion of Greece) joined together to form an economic and monetary union with

the euro as its common currency.

With the introduction of euro banknotes and coins at the beginning of next year,

this process will become visible to all inhabitants of the euro-area countries and

to the world at large. Then, the existing national currencies will forfeit their

function of being legal tender.

Along with the responsibility for monetary policy, the participating national cen-

tral banks also transferred part of their former foreign exchange reserves, in the

total amount of 39.46 million euros, to the European Central Bank – some 15 % of

that sum in the form of gold, and approximately 85 % thereof mainly in US dollars.

Thus, the greater part of the erstwhile foreign exchange reserves remained in

the hands of the national central banks for the time being. Incidentally, those

banks continue to manage the reserves transferred, albeit with the aid of joint

15

investment-policy principles and strategic benchmarks. In line with the

Maastricht Treaty the ECB may call on the NCBs to transfer further foreign

exchange reserves.

This shows that the aggregate official foreign exchange reserves of the euro

area – that means both those transferred to the ECB and those for the time being

remaining in the hands of national central banks – are now in the area of respon-

sibility of the Eurosystem (Article 105, section 2).

Incidentally, a debate on the function of official foreign exchange reserves has

been in progress ever since the global transition to the system of floating ex-

change rates. In my opinion, foreign exchange reserves play an important role,

even for floating currencies. The chief factors affecting the markets’ assess-

ment of a currency are, admittedly, a country’s economic performance, the poli-

cies influencing that performance and the monetary policies of central banks.

But foreign exchange reserves may likewise have some bearing on the appraisal

of a currency and thus also to the credibility of central banks.

Consequently, not only the scale of the official reserves backing a currency but

also their composition is important. In this connection, gold reserves may con-

stitute a specifically confidence-inspiring element, because they are important

for the confidence of the ordinary people and because in the event of a crisis,

they can be used as collateral for loans that may be needed

Two years ago, the Eurosystem (that is to say, the European Central Bank,

along with the national central banks), together with other G-10 central banks,

adopted an agreement on limiting gold sales, which, happily, has helped to

stabilise the gold price in the meantime. That agreement demonstrates that

the central banks of this group have no intention – at least, not in the foresee-

able future – of engaging in heavy gold sales beyond those which have already

been announced.

However, I do not regard the pegging of currencies to gold – an issue regularly

brought into the debate by certain commentators – as realistic or making sense,

under the conditions prevailing today and tomorrow, either for the euro or for

any other currency of international significance. Under present-day and likely

future economic conditions, movements in the supply of, and the demand for,

gold, as well as in gold prices, cannot in my view constitute a reference variable

for the monetary policy pursued by the major central banks.

III.

The experience gained to date with the euro has on the whole been pretty fa-

vourable, in my opinion.

Despite a short-lived steep rise in the inflation rate, the internal stability of the euro

is largely assured. With the waning of the special trends in energy, farm and import

prices, the inflation rate in the euro area is moving distinctly downwards again.

16

Moreover, in spite of divergent movements in growth and employment among

the individual countries, there have to date been no serious political tensions.

Throughout the euro area, conditions and interest rates in the money market

are largely uniform today.

In the capital markets, this far-reaching integration is, however, still incom-

plete. Unfortunately, diverse national statutory provisions still stand in the way

of full integration. But here, too, some progress is discernible.

The transition to the euro and the single monetary policy have made financial

market competition in the euro area fiercer, and have meanwhile engendered a

number of cooperative ventures, mergers and acquisitions among financial insti-

tutions. I am sure that this process will proceed further in the months ahead –

especially across national borders.

However, trends in the euro exchange rate in the first two years have posed

some problems, notably relative to the US dollar. As you know, the euro has

tended to be weak – particularly up the autumn of last year. That weakness

mainly was due, on the one hand, to the temporarily inordinate strength of the

dollar, but it also reflected, on the other hand, unresolved structural problems

besetting a number of euro-area countries, as well as uncertainties affecting

the further course of political integration in the euro area, and future participa-

tion in that monetary union.

In the meantime, some of these factors, which are detrimental to the exchange-

rate movements, have been mitigated or remedied.

Some of the major euro-area nations have taken initial steps towards reform,

and at least a few countries are now pressing for clarification of the politico-

institutional integration process in the EU.

Moreover, the conditions for the accession, in the future, of new EU countries

from central and eastern Europe to monetary union, and to the euro area, are

now being spelled out more clearly than used to be the case in earlier times.

Even so, in the estimation of the markets, a number of uncertainties apparently

still remain. Further clarification is unquestionably required in those instances.

With respect to the forthcoming EU enlargement, such issues also include the

statement that membership of the EU is not synonymous with a right to mem-

bership of monetary union. The Maastricht Treaty rightly provides, for all the

participants in monetary union, for a test period of no less than two years for

complying with the convergence criteria specified in detail. During that test

period, incidentally, not only the four often-mentioned convergence criteria,

but also the reference variables expressly laid down in the Treaty (such as the

integration of the markets, the development of the balances on current account

17

and the movement of unit-labour costs and other price indices) must be exam-

ined.

The decision on membership of the three EU countries not so far participating in

monetary union lies primarily in the hands of those countries. The United King-

dom and Denmark have hitherto exercised their right to ‘opt out’. In my opinion,

it is hardly to be expected that those countries will avail themselves at very

short notice of their right to join the eurozone. It is true that signals in that

direction are to be heard from time to time from Tony Blair and some other

people from the UK, but – on top of the threefold obstacle he has erected him-

self (decision “by the government, by Parliament and by the people”) – under

the Maastricht Treaty, the United Kingdom would, first of all, have to participate

in ERM II for two years “without devaluation”. That does not apply, incidentally,

to Denmark, which has been pegging the Danish krone to the euro, via ERM II, for

quite a while without encountering problems. Sweden is subject to the same

obstacles as the UK – namely, prior two years participation in ERM II without

devaluation. At least the Treaty is clear on this point.

IV.

But, no matter what those three countries ultimately decide to do, European

monetary union and the euro have already changed the international monetary

system to some extent.

Nowadays, the euro is unquestionably the second most important currency after

the US dollar. It represents an economic area, which, while not quite equal in

potential to the United States (in terms of the gross national product), is already

more closely integrated in the world economy (in terms of world trade) than is

the United States.

True, the international use of the US dollar is currently far greater than that of

the euro. As a reserve currency, investment currency and settlements currency,

the dollar is still distinctly ahead of the euro.

But there is no mistaking the fact that the euro is now catching up in some

market segments. It is ultimately the markets themselves that decide on a cur-

rency’s international role. In this connection, besides the size and performance

of the economy and the policies behind that currency, the assessment of a cur-

rency’s future development is likewise of great significance. A new currency,

such as the euro, can build up a reputation only gradually. But there is no deny-

ing that its potential is considerable.

In the IMF’s special-drawing-rights basket, the euro already accounts for a share

of 29%, behind the US dollar (at 45 %) and ahead of the yen and the pound

sterling (at 15% and 11%, respectively). Although membership rights in the IMF

continue to rest with the individual member states in the euro area, the repre-

18

sentatives of the Eurosystem are involved in the process of the regular surveil-

lance of the various euro-area nations by the IMF.

V.

However, the launch of the euro in 1999 did not radically change the global

monetary system. That applies particularly to the exchange-rate system.

Within the euro area, of course, all mutual exchange rates ceased to exist. But

that has not radically altered – at least not so far – the global system, in which

floating exchange rates are the dominant feature. It is my belief that this sys-

tem will not change in the foreseeable future.

Since the collapse of the fixed-rate system of Bretton Woods, beginning in 1971

and concluded in 1973, there have repeatedly been proposals, and even spo-

radic initiatives, of enhanced exchange-rate cooperation among the major world

currencies. I would recall only the target-zone concept advocated in the early

eighties by Bergsten and Williamson. Some commentators have even mistakenly

interpreted the exchange-rate cooperation schemes agreed, which were 1985

and 1987, under the so-called Plaza and Louvre Accords, as target-zone con-

cepts. But the cooperation schemes actually agreed among the G-5 countries at

the time, and I was involved in that, were far removed from a binding target-

zone concept. They focused primarily on improved cooperation in the area of

national economic and fiscal policy occasionally accompanied by some signal

interventions in the foreign exchange markets.

Since then, the idea of target zones between the major countries has been aired

again quite frequently, for instance, in the period following the launch of the

euro. And Bob Mundell, who will be here today, has meanwhile spoken out sev-

eral times in favour of defining and defending target zones between the dollar,

the euro and the yen. He is even going further; that should be only a step to

binding the three currencies to a fixed rate system, and in the end, bringing

them together into an international currency.

But, given the reigning conditions in today’s foreign exchange markets, propos-

als for target zones do not have a realistic chance, in my view. Problematic

though the volatility and, on occasion, the overreactions of the markets are, I

regard any defence of exchange-rate target zones between the major world

currencies, defined and announced in advance, as being utterly impracticable.

At any rate, in view of the dimensions of the market, and the overriding impor-

tance of expectations, the risk of speculative counter-movements and exag-

gerations would be immense. The very announcement of target zones would be

tantamount to an invitation to stage a speculative test. Hence the United States

in the Eurosystem have rightly refused so far to define any target zones in pub-

lic; and it is my conviction that they will continue to do so in future.

However, the rejection of any formal system of target zones does not rule out

the possibility of regular consultations or occasional signal interventions in the

19

foreign exchange markets. Judging by past experience, though, such signal in-

terventions make sense only if, in a given case, they are carried out by both

sides simultaneously, and if they are not unduly frequent.

My experience has been that intervention signals are heeded only if they make it

plain that both sides are agreed that the ruling exchange rate represents an

unequivocal misalignment. After all, only concerted operations actually impress

the markets, with the involvement of representatives of the stronger currencies

being essential on one side, unilateral interventions from the weaker side can be

counterproductive. So I’m not in favour of a formalised target zone system, but

I’m in favour of co-operation, discussion, information and exchange of views. In

case there is, in the view of both sides, a misalignment, then single interven-

tions can play a role. But only if both sides are really doing it and showing it to

the market. And let me say, the question is absolutely not the amount of that,

it’s a question of signalling; that is precisely what is important.

However, the question of the exchange-rate linkages of smaller currencies must

be distinguished from that of the exchange-rate movements between the major

world currencies: the euro and US dollar. That applies particularly to any link-

ages of those smaller currencies to one of the major currencies.

Admittedly, there have been some changes in this respect, too, in the course of

the past decade. While a number of countries have relinquished their earlier

links to the US dollar of the yen (e.g. Mexico, Brazil, Thailand, Korea or Indone-

sia), others have actually intensified their links (e.g. Argentina or Hong Kong).

Whether these ties can actually be maintained in the long run, however, still

remains to be seen. The position adopted by many US economists – either com-

plete flexibility or absolute fixing – has undoubtedly gained more acceptance in

practice all over the world in recent years. European countries, however, have

subscribed to this alternative only in part. In Europe, following the launch of the

euro, ERM I, which had existed until then, was modified. The new system (ERM

II) applies in principle only to non-euro-area countries, and incorporates more

flexibility in some rules (e.g. wider fluctuation of margins and simpler

realignments and so on). Of the present EU member states, however, only Den-

mark belongs to this system, which I mentioned.

In the next few years, though, this ERM II could assume increasing importance,

especially after the likely enlargement of the EU to include states in central and

eastern Europe. After all, if the new EU countries subsequently want to become

members of EMU as well, they will inter alia have to absolve an at least two-year

test period in ERM II. In view of the manifest desire of many EU candidate coun-

tries to join the Eurosystem at an early date, ERM II will probably assume grow-

ing significance in Europe in the next few years.

Viewed as a whole, however, such regional exchange-rate linkages in Europe will

hardly durably alter the existing international system. The same thing applies,

in my view, to other regions, too.

20

In my opinion, there will continue to be exchange-rate links with the dollar, and

also with the euro, in a number of instances (e.g., through Currency-Board sys-

tems). In specific cases, there may even be more far-reaching ties, in the form

of dollarisation or euroisation. Furthermore, in some parts of the world (e.g. in

Merosur or the Caribbean area) efforts are being made to enhance regional mon-

etary cooperation.

In my estimation, however, major and fundamental changes to the global ex-

change-rate system are unlikely in the foreseeable future.

VI.

But the further course of events in the international financial system is probably

much more difficult to foresee.

The progressive development of the financial markets will in my opinion persist

in the next few years – notwithstanding all the new controls probably introduced

in the context of combating terrorism.

The pressure to include offshore territories in those international controls will

presumably increase, but such enhanced anti-criminal activities will not obstruct

the further development of the global financial markets.

The crises that erupted during the nineties showed that expansionary and inno-

vative trend in the financial markets give rise not only to great benefits – in the

shape of an improved allocation of resources – and therefore to greater prosper-

ity, but also to new risks.

In particular, the proliferation of so called contagion effects generates risks not

only to the institutions and countries directly involved; it may also engender and

trigger serious systemic risks.

In order to counteract such potential systemic risks, some major steps have

been taken in the past few years and will be taken.

• And, in combating crisis that have already broken out, the IMF now some-

times accentuates different aspects from what it used to. In order to pre-

vent, as far as possible, bailout expectations from arising with respect to

other countries, it has become more careful about gauging the scale of liquid-

ity assistance. The new IMF management would apparently like to revert more

to the original role of the IMF as a catalyst’ of crisis resolution, and to move

away from the role of a lavishly operating development and insurance agent.

• At least as important as these improvements in the operating practice of the

IMF are its efforts to ensure enhanced cooperation among the various na-

tional and international institutions and organisations responsible for finan-

cial market oversight and systemic stability.

21

In 1999 the countries of G-7, acting on a proposal from myself, decided to set up

an ‘International Stability Forum’ (ISF). That body, which is located in Basle,

regularly brings representatives of the supervisory authorities (those for banks,

insurance companies and also stock exchanges) in the major financial centres

together with representatives of the IMF, World Bank, OECD and BIS at what is

known as a round table.

The purpose of these consultations is the regular review of the overall condition

of the financial system, the identification of vulnerabilities and the institution

of concrete measures to prevent the emergence of crises.

This “quiet preventive work” has already ushered in may important initiatives,

ranging from minimum supervision in the offshore centres and enhanced trans-

parency in hedge funds activities to the definition of a core catalogue of mini-

mum standards.

Especially in the past few weeks, now that the anticipated new global upswing

has failed to materialise, and that new dangerous uncertainties have arisen as a

result of the terrorist attacks, the exchange of views and experience within that

Forum has been greatly stepped up. Happily, the financial market infrastructure

in the United States, which was in disarray for a while, has rapidly recovered. In

addition, it has transpired that the contingency plans already existing in the

financial institutions are proving their worth. So far, so good.

But if the expected new upswing in the total global economic activity continues

to be delayed (let alone if a short-lived recession supervenes), the national and

international financial markets will demand special attention. Up to now, any

losses accruing among the financial institutions have been cushioned above all

by drawing on reserves, without exerting undue contagion effects or causing

systemic difficulties. It is highly important that this should continue, even in the

event of further losses. Hence all supervisory authorities must cooperate very

closely under these conditions, and keep each other duly informed at all times.

VII.

Notwithstanding the difficult conditions ruling in the world economy, the global

monetary and financial system has hitherto proved to be resilient. Even so, at

the present time, particularly careful monitoring and, if need be, a rapid and

effective response are required.

Calls for a fundamentally new architecture of the monetary system, or mere

demands for that evergreen, the Tobin Tax, do not get us any further. If any-

thing, they divert attention away from the realistic improvement options, or

even lead astray, because they only foster new distortions.

With the advent of the euro, monetary conditions and the outlook for more

stability as a foundation of economic growth have improved, at least in Europe.

22

Despite all the temporary difficulties, the ECB has so far kept the euro largely

stable at home, and also free of conflicts. Compared with previous experience,

that is a step forward for the euro-area countries.

Furthermore, the exchange rate of the euro now seems to have stabilised at a

lower level. That is an economic and political advantage, both for the global

system and for the Eurosystem.

I am convinced that the euro has an immense potential, both for integration in

Europe and for the further development of the global monetary and financial

system. Alongside the dollar, it can become a strong and globally recognised

second world currency.

In return, however, the euro-area countries must currently face up to the associ-

ated new challenges. They must make and keep their economies sufficiently

dynamic, innovative and competitive. Along with the monetary policy of the

ECB, they must conduct their fiscal policies in a credible and longer term stabil-

ity-oriented way.

And, now that first steps have been taken in the monetary sphere, they must

likewise clarify and define the future course of integration in other political areas.

A lastingly stable and strong euro will confer greater stability on the interna-

tional system as well.

To that extent, I think my outlook for the international monetary system – not-

withstanding all the real economic uncertainties obtaining at the moment – is,

on the whole, relatively optimistic. But, like every outlook, it depends in part on

the fulfilment of the conditions I have specified in detail.

Thank you very much.

23

The benefit of the euro for neighbouring countries

Krzysztof Majczuk

Director, Foreign Exchange Department

National Bank of Poland

Ladies and Gentlemen, it is a pleasure to address this Conference today. Let me

present a brief overview of the current and potential impact of the euro upon

the Polish economy. The euro is a symbol of successful economic and monetary

integration within the EU. It strongly influences the international financial envi-

ronment. The euro also contributes to fundamental social, political and eco-

nomic reforms in Poland.

I prepared to do a long speech. In view of the fact that our time is limited, I

shall present you with some elements of the prepared text.

Poland recognises that monetary union is fundamental to the integration of Eu-

rope. The key advantage of monetary union is nominal exchange rate certainty

within the euro-area. This brings practical and material benefits: increased

competition through greater transparency of prices and lower transactions costs,

deeper and more liquid financial markets. This will help to complete the single

market, limit price discrimination and other restrictive practices.

Poland wishes to join the euro. This is both a political commitment and a matter

of national economic interest. Poland continues to pursue macroeconomic,

monetary and fiscal discipline in order to be eligible. The Government is com-

mitted to that course. I will begin by speaking about the issue of choosing the

most appropriate exchange rate. Then, I shall discuss the impact of the euro on

Poland’s economy. I shall continue with setting out the advantages of EU and

EMU membership. And finally, let me touch on our level of preparedness for

substituting EMU national currencies into euro.

Relations between the EU and Poland show deepening economic integration.

Just look at the negative impact of the general European slowdown on estimates

and forecasts for Polish growth. Since early 2001 it has been revised several

times, from 4.5% to 2%.

International trade and investments are key to integration. According to the

EUROSTAT, Poland was the fourth biggest market for EU products in 2000 after

USA, Switzerland and Japan, and the seventh biggest exporter to the EU, after

USA, Japan, China, Switzerland, Norway and Russia.

For Poland the EU - as a single economic area - is the main partner for exports

and imports. Poland’s leading partners are Germany (50% of exports and 40% of

24

imports), Italy and France, generally. 70% of Polish goods were exported in 2000

to the EU member states and over 61% of imported goods came from those

countries. Despite this structure, the strong zloty/euro rate eased the external

disequilibrium of the Polish economy in 2000. In contrary, opportunities in Po-

land’s main export markets increased markedly.

In 2000 Polish exports to the EU amounted to EUR 23.9 billion. This is 14.6%

higher than in 1999. This significant growth was attributable to the three fac-

tors: an 11% increase in the volume of the euro-area imports (including growth

of 10.5% in German imports), the slowing of Polish domestic demand growth and

depreciation of real zloty exchange rates against the US dollar. Another crucial

factor is Poland’s cost competitiveness. During the same time Polish imports from

the EU increased by only 0.4% in comparison with 1999 data and stood at EUR 32.3

billion. That rise in import volumes in 2000 resulted from a substantial decline in

domestic demand growth, coupled with an acceleration of export growth.

The structure of Polish trade is reflected in the share of payments made in euro.

This shows the growing importance of the euro in foreign trade. This is an

ongoing process. Since 1999 data, the use of the euro has gone up by approxi-

mately 8 percentage points. The average share of the euro in export payments

in 2000 was 49%, and 48% in the case of import payments. This level exceeds the

share of US dollar in international transactions, which were 36% in export and

35% in import payments.

Share of the euro in export

payments made in 1999 and 2000

Share of the euro in import

payments made in 1999 and 2000

0

10

20

30

40

50

60

I II III IVquarter

%

1999 2000

0

10

20

30

40

50

60

I II III IVquarter

%

1999 2000

0

10

20

30

40

50

60

%

I II III IV

quarterUSD DEM EUR

0

10

20

30

40

50

60

%

I II III IVquarter

USD DEM EUR

Export payments made in 2000 -

breakdown by main currencies

Import payments made in 2000 -

breakdown by main currencies

25

Systemic changes (including lifting trade barriers) as well as the prospect of EU

membership have significantly raised the confidence of foreign investors in the

Polish market. Foreign direct investments have an impact on the structural

changes of the Polish economy and the dynamic of its growth (through know-

how, easier access to international outlets, development of the domestic mar-

ket). Moreover, they finance the current account deficit. EU member states are

the largest direct investors in Poland. According to the Polish Foreign Invest-

ments Agency, out of a total of EUR 53.3 billion invested in Poland between 1991

and 2000, almost EUR 33.5 billion came from the EU. The highest FDI inflows

came from France (EUR 8.5 billion), Germany (EUR 6.4 billion), the Netherlands

(EUR 4.5 billion), Italy (EUR 3.7 billion) and Great Britain (EUR 2.4 billion).

The euro, since its launch on 1 January 1999, has strongly affected the terms of

trade. Improving the cost and prices transparency as well as reducing transac-

tion costs, the euro forces all business operators, including banks, to enhance

their competitiveness. This pressure is noticeable on the macro- and micro-

economic level.

The euro is an important element of intra-bank competitiveness. Commercial

banks in Poland offer a broad range of products denominated in euro. They will

convert accounts kept in eurozone currencies into euro free of charge. At the

end of the first quarter of 2001 the share of accounts held in euros by legal

entities equalled those kept in US dollars and stood at 35.5% (compared with

60% of dollar and 15% of euro account in 1999). The introduction of the euro has

caused a far-reaching convergence of conditions for banking products and serv-

ices in Poland. This tendency was recognised in particular in cross-border credit

transfers and international settlements. Since 1999 the average quarterly vol-

ume of cross-border payments made in euros has risen by around 10%.

Polish commercial banks have seen an unexpected interest by corporate borrowers,

especially corporate, in credits granted in euros. They were very popular in 2000

due to more favourable rates resulting from lower level of nominal and real interest

rates compared with zlotys and the strong exchange rate of zloty against euro.

Membership in the European Union and Economic and Monetary Union is the

main strategic goal of Poland and one of the main challenges facing both Polish

politics and economy. We are well advanced in preparing for participation in

further stages of European integration and introduction of the single currency.

Being outside the euro club, as an associated but still a third country, Poland is

affected by the changes taking place inside the single economic area. Increased

mutual trade, more investments, and greater interest in the euro as an interna-

tional currency are not the only examples. This impact is expected to grow in future.

Poland is willing to join the euro in the final stage of its economic integration

with the EU. We are fully aware of the benefits of the single currency. Those

include: elimination of foreign exchange risk, reduction of transaction costs,

26

more transparent and comparable prices, more dynamic trade and stronger com-

petition, and optimum capital allocation. However, it is essential that we un-

derstand some practical challenges that arise, such as loss of national currency,

loss of exchange rate adjustments and losing the sovereignty of national mon-

etary policy to a single supranational monetary policy. In view of the above, it is

perhaps much more important to realise that those challenges need to be re-

garded as a natural consequence of the monetary integration process, which

lead to the benefits mentioned earlier.

Polish positive attitudes towards the euro come from expectations regarding the

long-term economic benefits of the single currency, such as: enhanced trade and

increased efficiency of production, macro-economic stability and credibility gains

as well as rapid economic growth that stimulate domestic savings.

At this final point, I would present the currency composition of Polish reserves as

it provides a clear evidence of the Euro share enlargement. For a long time there

have been two currencies - Deutsche Mark and French Franc - comprising 35% of

total foreign exchange reserves. On the very first day of the euro introduction

those two currencies have been converted into euro. Then, a year later, the

Swiss Franc was exchanged into euro. The share of euro increased to 40% of our

total foreign exchange holdings.

You may wish to know that Poland is especially attached to gold. The name of

our currency - zloty – means gold in the Polish language. The origin can be

traced through our millennium history; gold coins with Polish royalty’s effigies

have been minted in medieval centuries and for a very long time have been used

– beside the silver ones - as means of tender. As time passed the economic case

for gold has changed. Almost the entire gold holdings of the National Bank of

Poland came from the holdings of the central bank of Poland (Bank Polski – Bank

of Poland) before World War II. During the Nazi regime this stock had been

deposited in the Bank of England, the Federal Reserve Bank of New York, the

Bank of Canada and a small share in the Bank of Romania. Gold returned after

the war and for a couple of decades remained on a virtually unchanged level. In

1995-1998 there was a dynamic increase of foreign exchange reserves. There-

fore, we decided to purchase additional amount of gold in 1998 when the re-

serves exceeded 24 billion US dollars. The first reason was its small share in

reserves (over 1% before purchase) relative to other central banks standards,

and the second reason was to improve diversification of foreign holdings.

At present Polish foreign reserves consists of over 3% of gold (103 tonnes = 3.3

million ounces). This it is not too much, especially when the ECB reserves main-

tain 85% in foreign currencies and 15% in gold. For the time being, we cannot

make any decision concerning gold share changes of our reserves as we have to

take into consideration the issue related to our contribution to the European

Central Bank, which will be further discussed and negotiated.

27

Questions:

Challenges for Europe

Chair: Thank you to Professor Tietmeyer and Mr Majczuk. I was delighted to hear

your comments, respectively with Professor Tietmeyer, about the role of how

gold builds confidence in central banks…

Professor Tietmeyer: (interrupts) It can build.

Chair: It can build confidence in central banks and above asset diversification,

from your point of view, Mr Majczuk. But I’d like to open the floor to your good

selves to hear your questions. We have, ever the time watcher, until 10.25 for

panel discussion. I’m sure you have a couple of questions. Yes, please.

Questioner: Thank you very much Professor Tietmeyer and Mr Majczuk. It was a

very interesting presentation. My name is Osa, I’m representative of the Bank of

Japan in Frankfurt. And I have two questions; one for Professor Tietmeyer and

one for Mr Majczuk. My first question is: Professor Tietmeyer mentioned some

kind of international role of the euro. ECB has announced it is neutral in terms of

the internationalisation of the euro. In other words, ECB neither promotes inter-

nationalisation of the euro, nor hinders the euro. But it seems to me that candi-

date countries, especially in Eastern Europe, have a kind of incentive to be a

member of the euro area. That means internationalisation of the euro has a kind

of self promoting mechanism inside, it seems to be at least so. What would be

playing the major role as a self promoting motor in euro? I would like to hear the

view from the hosting side of the euro from Professor Tietmeyer. My next ques-

tion is for Mr Majczuk. You explained the merits of the euro as a neighbouring

country, but I think there must be some disadvantages in terms of the euro as a

neighbouring country. If any, what would they be?

Chair: Thank you. Professor Tietmeyer?

Professor Tietmeyer: I share the view that the international role of the euro

cannot be directly promoted, and should not be directly promoted. But – the

international role of a currency depends, first, whether this currency is really

seen as a stable one, and secondly, whether this currency is representing, let me

say, a bigger part of the world economy. As far as the first criterion is concerned,

the stability, of course a new currency has a special difficulty to build up its

credibility. An existing currency – like the dollar, like the Fed behind the dollar –

they have already established, for some time, a reputation. And of course a

newcomer like the euro, on the one hand, has the heritage of the other curren-

cies which came in, and central banks which came in, but on its own it has to

build up its value and its international role. But, as I said, you cannot decide, “I

want to be an international currency”, it depends, first, whether the precondi-

tion of stability and credibility is there or not. Second point: of course, if this

currency is used by a bigger part of the world in itself, that means, for example,

28

not only by the euro countries but also by the enlargement of the euro area, that

means in itself, already, the role is to some extent international. But, I think there

is no trade off, let me say that precisely, between the first and the second crite-

ria. If a broader based currency is not seen as a stable one, over the time, then of

course it will not play an international role to that extent which is possible.

The question is, of course, what is an international role? Should it be the role as a

reserve currency, investment currency, transaction currency, that means used for

normal export and import in the real sector. And of course, it will not be easy, let

me say, to compete with the dollar in the oil sector, or in some other raw material

sectors, or in the air traffic also. But I’m not excluding that over time because

there will be de facto competition, and that means, it could be the case, that

even in such areas, the euro could play a role, and an increasing role but as I said,

that cannot be done by a decision from the European Central Bank. That cannot be

done by the decision of any official institution. It will be the reflection of the

assessment of the markets for that currency. And the assessment of the market of

that currency depends on the size, but not only on the size; it depends at the same

time, of course, on how it is seen over time as value. You could already see that

the DM, which represented only a relatively small area of the world economy

played a much bigger international role, looking at the reserves, looking at the

investment, That was a consequence, I think, that this currency built up its cred-

ibility. So, my conclusion is, that the ECB is right in saying that it is neutral be-

cause the international role is not dependent on what the ECB is saying, no, it is

dependent on what is the assessment by the markets.

Chair: Thank you very much. Mr Majczuk.

Mr Majczuk: OK. For a transition country like Poland, the cost and benefit calcu-

lations show more opportunities than trades. The most important benefit arising

from EMU is participation in the stable currency area. This cannot be overesti-

mated in a country which experienced hyperinflation not a decade ago. Since

inflation is a monetary phenomenon, and is attached to a currency, inflation

disappears together with the currency. So this inflation cost with times of unem-

ployment in Poland now huge, lower inflation and lower inflation vitality bring

lower euro interest rates and boost investment. I think the biggest obstacle for

Poland is to perform in a currency area in which current EMU countries can gain

from labour markets. Significant instabilities in the market are at least partly to

blame for high unemployment in Poland. Low labour flexibility has the effect

caused by the structuring of the economy. The labour market has been guarded

by labour unions. Necessary forms of the labour market, its circulation and insti-

tutional infrastructure, are a huge challenge for our new government. Trades for

Poland arising from single monetary policy resemble fears expressed by EMU

countries before forming the Union. They are described by an overpriced opti-

mum currency area. It is not surprising that Poland and the EMU countries have

not yet formed an optimal currency area. Even current EMU members have not

yet formed such an area even after years of institutional and market conver-

gence. We still need time to prepare ourselves, maybe.

29

Chair: OK, thank you. I see another question here.

Questioner: I’m Peter Hambro, and I’m a gold miner. I think we should all be

very grateful to Professor Tietmeyer for instituting the International Financial

Stability Forum, and I’m very glad that it’s been so helpful to us in the recent

turbulence. I’d like to ask the Professor whether the involvement of Interna-

tional Financial Stability, as far as the gold market is concerned, is limited to the

nature of the Washington Agreement, or whether there is a broader involvement

of the Central Banks in the gold price. If that is indeed the case, what steps the

Professor thinks that the international forum should take to have the dialogue

that he so eloquently called for in the foreign exchange price convergence be-

tween large holders of gold like the Central Banks, and the producers of gold,

like myself and my other producer friends here today. Thank you.

Professor Tietmeyer: I think one has to be realistic on that point. First, it’s

clearly the case that gold is not playing a role as a basis for the currency. All the

ideas to link the currencies to the gold, and gold backed, even gold based… I

think that is unrealistic, one has to be clear on that point. The second point is,

as I said, the gold reserves are still existent in the reserves of the central banks

– and reserves are playing some role. One should be careful; you cannot substi-

tute a lack of credibility only by building up reserves. But, in my view, reserves

are playing a role, especially for small and emerging countries. Not so much for

the bigger areas, but especially for the smaller countries. So my feeling is that

the reserves are playing a role. And gold could be for those countries, especially

being available, as collateral in critical times. I’ve seen that many times, look-

ing back in the last 50 years, that gold was used as collateral, and on that basis

you can arrange in a short time a credit for the country.

Besides that, let me say, gold is for the people, still an important point. Not only

for the market but also for the ordinary people, who see as gold as a value that

goes over all the difficult times. At least one should not underestimate this

emotional element of gold. Now coming to the bigger countries, the last point

can also play a role for the bigger countries. But I think, looking from a pure

monetary policy, you could say, “Why could the central banks not sell the gold?”.

For the bigger gold holders, the central banks there is common interest; that

means value of the gold. If one would sell to a bigger extent, that would under-

mine the gold price.

Let me say, the most important element for the Washington agreement was this:

the common interest to hold the value of the gold at the appropriate level which

should not be negatively affected by the fact or intention, that one country is

selling gold and making money out of that, because that would then harm the

others. So it is the common interest of the big gold holders to stick to a big part

of their gold holdings, and that was the reason why there was a 5-year agree-

ment. Whether this 5-year agreement will, in the end, be prolonged, I don’t

know. But I can imagine that there is the common interest to, in the future. But

you should not expect that the central banks do it only for the credibility of the

30

monetary policy. That is, at least for the big gold holders, not the crucial point.

I think central banks are interested in having their reserves valued at appropri-

ate prices. And that is a very important interest and should not be underesti-

mated in future times because if some are going ahead in selling, it would have

a disadvantage for the others.

Besides this value interest – as I said, I see a reserve role especially for the

emerging countries and I see the emotional side inside the big countries, for the

people. For example, if all the European central banks would decide to sell their

gold, I’m not sure whether that would, at least in Germany, improve the assess-

ment of the euro; it could have a negative effect. One has to be very careful in

assessing. On the other hand, one should not overdo it, and expect too much

from the central banks because there will be no way back to a gold based mon-

etary system. Some in the United States are arguing in favour of that but I don’t

see that they will have any majority in the foreseeable future. What happens in

next centuries, I don’t know, but my forecasts are not going so far.

Chair: Thank you very much. You refer to the agreement struck in 1999, and

later on we’ll be hearing more about that, but let’s wait for that particular

contribution.

Professor Tietmeyer: (interrupts) The only thing I can tell you, is that I negoti-

ated that to a big extent.

Chair: Yes, thank you very much. One more questioner, please.

Questioner: Mike Lawrence, Moscow Norodny. It’s a short question for Professor

Tietmeyer. Does the Professor know of any statistics on the monthly numbers of

German workers emigrating to Ireland, to take advantage of the better eco-

nomic prospects of Ireland, which seems to me to be a fundamental prerequisite

for the “one size fits all” euro system?

Professor Tietmeyer: (Laughs) I have no statistics about that. But I’m pretty

sure that Ireland is an open country; that means everybody is invited to come to

Ireland as every European is invited to come to Germany, so it’s up to the people

to decide where they want to live, and in which part of the euro area - Ireland is

a very nice euro area no doubt about that, but I know some other very nice places

too. So it’s really up to the people. I have no statistics about that, but I know that

a lot of Irish people are working on the continent and making money there.

Chair: Thank you very much, Professor Tietmeyer. Making money is a nice chord

to strike to finish our first panel. Thank you very much Professor Tietmeyer and

Mr Krzysztof Majczuk.

31



Well, we know the world is moving closer together, and few places can be more

apposite for making that point than being here, in Berlin. The Brandenburg Gate

is often seen by us as the gateway to the East. To some of the guests here today,

I’m sure they would see it as the gateway to the West. Here we are, and we’re

delighted to be greeting three experts from their respective fields who will be

telling us about gold in Eastern Europe. Gold in Eastern Europe matters a lot to

the World Gold Council, as it does to the gold miners’ community, and we have,

just this week, published a study called “The Golden Road”, available to all of

yourselves who wish to have it, which gives detailed statistics of gold sourcing in

eastern Europe, in Russia and in the former CIS states.

Let me welcome Mark Rachovides, whose institution, the European Bank for

Reconstruction and Development, is one of the world’s great joint ventures. He

will tell us about gold mining and opportunities in Eastern Europe, followed by

Mr Sokolov, from Russia and Mr Alzhanov, from Kazakhstan, from their respective

central banks, to talk about the use of gold in reserve management there.

Welcome, Gentlemen

32

The contribution of EBRD to mining in Eastern Europe

Mark Rachovides

Principal Banker

EBRD

Mr Chairman, Ladies and Gentlemen, thank you very much. It’s nice, first of all,

to see so many familiar faces here. It’s a very opportune time for the EBRD to be

speaking at this gathering; it’s the EBRD’s tenth anniversary. I will speak today

on our contribution to gold mining in Eastern Europe. I’ll divide my presentation

today into three parts. Firstly, I’ll give a brief overview of the EBRD, for those

that are not acquainted with my organisation. Secondly, I’ll speak a little bit

about our activities in the CIS and Eastern Europe. Finally, I’ll offer you some

thoughts as to the situation today, and possibly the way forward.

!"

Shareholding of the EBRDShareholding of the EBRD

EU 55.12%

Others14.58%

Japan8.52% CEE & CIS

11.78%USA10%

As I’ve mentioned, the EBRD was founded ten years ago. It’s a multilateral

entity. It exists to foster the transition towards open market economies in cen-

tral and eastern Europe. As you can see, we’re majority owned by the European

Union, and have shareholdings now of, I believe, 60 countries and institutions.

Why do we exist? As I say, to promote the transition to a free market based

economy, to improve the general investment climate for most of you here, to

improve corporate governance and to provide improvements in standards in both

environmental aspects and throughout. We seek to promote development in all

respects; be it in terms of transparency, technical progress, environmental

progress and, to a degree, social progress.

I’m a member of the Natural Resources Team at EBRD. We cover oil, gas and

mining, and we largely deal with private sector projects; we distinguish our-

selves from the World Bank particularly in that respect. We provide a significant

33

volume to the EBRD’s business. We are one of the larger teams and certainly in

terms of revenue, one of the most significant. Our activities in gold mining have

started with the inception of the Bank. One of our first, and largest, projects

was our Zarafshan-Newmont project in Uzbekistan. These figures give you an

indication of our current portfolio. What they don’t really tell you is the amount

we’ve actually invested so far. In gold mining, we are the largest single financial

investor in the CIS and we’ve actually invested, so far, close to 400 million dol-

lars. That may sound impressive, but if you compare it to our oil sector invest-

ments, those are touching 2 billion dollars at this stage. I’ll come back to that

later, but it merely gives you an indication of the slow progress by comparison to

other industries that gold mining has made.

!"

Sector distribution in millions of EurosSector distribution in millions of Euros

215

955

17019

Metal Ore Mining

Oil and GasExtraction

PetroleumRefineries

PipelineTransportation

A brief indicator of where we do our business: Russia is by far our largest area of

business, and indeed, that’s reflected in our gold portfolio particularly. To an

extent, these figures also reflect opportunities in our region. What I would like

to say is that there are a number of countries in central and eastern Europe that

haven’t received much, if anything, in the way of foreign investment. Armenia,

for example, has substantial gold reserves as does Kazakhstan. Both are fairly

!"

Natural Resource Projects per CountryNatural Resource Projects per Country

0

100

200

300

400

500

600

700

Euros(Million)

Slo

veni

a

Ukr

aine

Hun

gar

y

Rom

ania

Geo

rgia

Kyr

gyzs

tan

Turk

men

ista

n

Slo

vak

Rep

ublic

Aze

rbai

jan

Uzb

ekis

tan

Rus

sia

34

good examples of failure in gold mining. To an extent, I’m a strong believer that

that reflects the depressed gold price environment that the EBRD has seen for

most of its existence. I can’t help but say, that were the gold price to improve,

opportunities in our region would follow.

Just to give you an idea of how we do our business: we are self-insuring. We

won’t ask you to go out and purchase political risk insurance if you are an inves-

tor. We will take on project financings of political risk largely ourselves. We will

take equity risk, be it formally or through a project financing structure. But we

will ask all projects to meet normal commercial criteria: they must be viable,

they must meet the standards applicable anywhere else in the world. We’ll

expect gold mining companies to have competent, stable management and have

the ability to assume operational, technical, environmental and other risks. We’re

not in the business of running gold mines; we’re in the business of helping peo-

ple like Mr Hambro to do that.

How do we offer our financing? Very simply, we don’t offer a broad range of

sophisticated products. We, as I say, are concentrating on project finance.

Generally, that takes the form of debt. We will take equity and we will support

projects with derivative transactions. We have made gold loans, we have pro-

vided hedging programmes. We have provided pre-production financing, even

down to artesmal mining companies in Russia.

We have some fairly straightforward foundations for the way we do things. I’ll

explain in a little more detail, but essentially: transactions have to make sense.

We really have to lead the market - that’s what we mean by using this strange

word, additional. Thirdly, we really must see some demonstration or transition

impact in any of our projects. As I mentioned, sound banking principles essen-

tially mean that the transactions must make sense. In gold mining, this really

does mean extensive and careful due diligence. In Russia particularly, it would

mean extensive legal due diligence. In many cases we find that multilateral

institutions will actually develop, and to an extent, improve regulatory and le-

gal frameworks in countries of operation. We’ve undertaken work in Bulgaria,

Uzbekistan, Kazakhstan, for example, in providing a more condign legal and

regulatory environment for potential investors. We would seek to obviously

obtain a fair balance of risk and reward for all parties. That might sound a very

grand and romantic statement, but we believe it is achievable through sensible

project negotiation and conditionality.

We seek to ensure that investors will obtain suitable risk-adjusted returns. Essen-

tially, we realise that investing in eastern Europe is, by comparison to alternative

investments, often difficult. Whilst even in a good gold price environment returns

may seem attractive, political risks have, in general, seemed daunting to many

investors. I think if I’m correct, if we looked at the amount of mining companies

interested in Russia, for example, when the Bank was started in 1991, you could count

them between 30 and 40. At least 20 of them were quoted on the London Stock

Exchange in some way. Today, I would say that there are probably no more than 6.

35

!"

Ensuring impact on transitionEnsuring impact on transition

EBRD’s projects should enhance:

! Creation, expansion and improvement of freeand competitive markets, including privateownership

! Establishment and strengthening ofinstitutions, laws and policies supportive ofthe market

! Adoption of market-oriented, good corporatebehaviour and skills

As I said, we would never seek to compete with commercial banks. I hope that

comes as some relief to some of my competitors here! We would seek to lead

the market. We would seek to develop financial structures that are appropriate

to countries; in many situations that entails really making it up. We really have

to structure transactions for the first time in many countries. That often leads to

an extensive preparation period for regulators, for counter-parties, and with steeper

learning curves that does mean that projects can take time. As I say, that means

that the boundaries of transactions are extended, we do break new ground. Our

maturities of transactions tend to reflect that, but we like to think that we would

try to open doors for potential investors. We’d like to think that our transactions

lead to follow on developments. As I mentioned, our primary existence is to

ensure transition to market economies; I think the slide speaks for itself.

To talk a little bit about what we’ve actually done in gold mining: I think we

have a pretty successful gold mining portfolio. In Russia, the largest operational

gold mine is the Kubaka mine, which is part of the Omolon Gold Mining Company.

That project cost approximately 300 million dollars. It produces approximately 13

tonnes of gold a year. We provided financing, in co-operation with OPEC, of 62.5

million dollars, and it’s now operated by Kinross Gold of Canada. It’s the largest

and most modern mine in Russia. It’s led the way in terms of technical innovation;

it’s brought technology from the Arctic oil industry of Canada and the United

States, and seen it applied in permafrost conditions in Russia. It’s totally trans-

parent; it has western operating and accounting standards. Indeed, its environ-

mental and health and safety performance compares with any mine in the world.

You can do business in Russia, I must tell you this. With perseverance, with com-

mitment and quite a lot of faith, you can do business in Russia. There are a

number of companies that are doing so successfully today, but I really must say

that there are a lot of misconceptions about the gold business in Russia today.

Our largest investment, however, has been in Uzbekistan. As I mentioned, it was

our first investment. It’s the Zarafshan-Newmont project. This is a large heat-

leaching operation; in other words, it’s a secondary mining operation. Uzbekistan

36

is currently, I think, ninth in the world in its gold production. Were ongoing

projects to be developed and new projects to come on stream, I think Uzbekistan

could probably rise to fourth or fifth; its potential is enormous. The Muruntau

mine, for example, that feeds the Zarafshan project is absolutely gigantic; it

produces something like 2 million ounces of gold per year. Newmont have been

there now for approximately ten years; the mine has been in operation since

1993. And, as I say, again, another world-class operating performance.

A different type of project is the Buryatzoloto mine. It gives you some evidence

of the variety of our portfolio. The Buryatzoloto is a smaller producer. We’ve

provided both debt and equity and a hedging programme. High River Gold is an

active shareholder in this project but is not the mine operator. This is essen-

tially a Russian project and doesn’t have a western sponsor putting its balance

sheet behind it. However, it’s a successful mine; it’s exemplary, again leading

the way in terms of technical and financial performance.

Our largest production mine is now in Kyrgyzstan. The Cameco-led Kumtor Mine

is now producing 700, 000 ounces a year. It’s doing well: has had a degree of

adverse publicity due to environmental incidents, but is now back on-stream in

a very difficult environment. I think we all know that Russia, and the whole CIS,

has enormous mineral potential. It’s very well studied geologically. There haven’t

been, I would say, enough foreign investors. I was privileged enough to read a

book over the summer holiday called “In Search of Soviet Gold” by an American

mining engineer called John Littlepage. He was active in Russia in the 1920s and

30s. If anybody’s interested in the history of Russian gold mining and the potential

of the area, I strongly recommend it to you; find it in a second hand book shop.

Gold mining has been active in Russia with foreign investment since Tsarist days.

It’s remarkable that EBRD – and you notice that I speak with some hesitation –

are the largest single investor in the Russian gold mining industry from a foreign

perspective. It says, perhaps, a lot. As I say, there are some good examples.

There is one new project, the Julietta mine in Magadan in the far east of Russia

that’s coming on, showing good potential. It’s a difficult part of the world to do

business with. The rouble is more stable than it was but high hard currency

contents can prove problematic in construction periods.

Again, to re-emphasise the points I’ve made: financing has been difficult. And

as I’ve mentioned before, political risk has proven to be perhaps the major

obstacle. I mentioned before that the oil and gas industry has been the benefi-

ciary of much greater investment from EBRD and throughout the commercial

banking world. One of the reasons for that is that it has become increasingly

competitive, apart from the obvious economic realities. But it’s a relevant com-

parison, I think, to say that the mining and the gold industry in general in Russia

hasn’t really experienced the same sort of international scrutiny and the pres-

sure to reform that the oil sector has. Environmental issues are, I think, com-

mon throughout the world and I’ll not dwell on that. And of course there is the

currency control issue. I think the slide will speak for itself.

37

Difficulties that have been the best known have surrounded the Dukat Silver

Project, where Pan-American Silver unsuccessfully attempted to develop a large

silver mine in the far east of Russia. Sukhoi Log is the name of a project that I

think is well acquainted to many of you, and has, I think, sadly become emblem-

atic of the difficulties associated with Russia, and privatisation particularly. As

I mentioned before, detailed legal due diligence is extremely necessary. A way

forward might be to examine production sharing agreements, and if anybody

would like to ask me about that, I’ll happily talk about that later.

As I said, in conclusion, Russia and Eastern Europe have enormous natural re-

sources. The risks associated with gold mining are common throughout the

world. In Eastern Europe and the CIS there are all the normal difficulties, plus

some more. It’s an evolving environment but we have clear evidence that you

can succeed. Major gold mining companies have succeeded, are producing,

are profitable, are leading the way. Smaller gold mining companies are also

there. I’ve mentioned Peter Hambro already; he and Kevin Foo of Celtic Re-

sources are two British entrepreneurs working in Russia. High River Gold of

Canada, for example, in Buryatzoloto.

Thank you very much, Ladies and Gentlemen.

!"

Regulatory environmentRegulatory environment

! Regulatory framework has not yetexperienced the international scrutiny andpressure to reform that the Russian oil andgas industry has seen

! Environmental problems pose particular risks

! Laws and regulations are designed to stemthe outflow of wealth

!"

How to contact usHow to contact us

Mark Rachovides

Principal Banker Natural Resources

Tel: + 44 207 338 7047

Kevin Bortz

Director Natural Resources

Tel: + 44 207 338 7119

!"

www.ebrd.comwww.ebrd.com

38

The role of gold in Russia’s reserve management

Vladimir Sokolov

Director, International Department

Central Bank of Russia

It is only a short time ago that the issue of the role of gold in international

reserves has become relevant for the Bank of Russia. Before that the proportion

of gold in our reserves was determined by historical factors. It can be seen from

Chart 1 that up until recently the share of gold in the official reserves of the

Russian Federation has been primarily dependent on the dynamics of the cur-

rency component of the reserves, which in its turn has been determined by the

nature of the exchange rate policy being pursued and in general by the macr-

oeconomic conditions in our country. It was only in 1997 that the Bank of Russia

started dealing in gold assets in the external market.

It is evident from Chart 2 that over the past few years the share of gold in our

international reserves has been fluctuating between 10 and 40 per cent. This

ratio reached its peak of approximately 40 per cent following the financial crisis

of 1998, when a substantial part of the currency reserves was spent on support-

ing the value of the rouble and government debt payments.

When the Russian economy began recovering and the external trade conditions im-

proved, the international reserves of the country started to grow rapidly. The main

source for their growth was represented by foreign currency revenues from exports

– the trade balance reached its all-time high of 60 billion US dollars in 2000. Conse-

quently, the proportion of gold in reserves started to go down. As of November 1,

2001 the official reserves of the Russian Federation amounted to 38 billion US dol-

lars, and the share of gold in that figure stood at the level of 10.5 per cent.

According to the resolutions of the Bank of Russia’s Board the primary objectives

of the reserve management activity are safety, liquidity and profitability of the

reserves. In this regard, it is appropriate to consider the question, whether gold

as a bank asset meets the requirements implied by the above mentioned objec-

tives. Here one can observe a significant diversity of opinions. We at the Bank of

Russia tend to support the conservative standpoint on the issue, given Russia’s

historical experience, which has more than once demonstrated a crucial role of

gold in rehabilitating the country’s financial system. Within this context we should

recall the monetary reform conducted by Sergei Vitte, who successfully estab-

lished the gold standard in Russia in late 19th

century, as well as the introduction of

gold-backed banknotes (“tschervonets”) that helped combat hyperinflation in the

1920s. At a later stage of our history the development of gold mining in the country

allowed the government to accumulate a large stock of official gold reserves, which

was viewed by the Soviet Union as an important attribute of state might.

39

Chart 1. Official Gold & FX Reserves of the Russian Federation (end ofi d)

0

5000

10000

15000

20000

25000

30000

35000

40000

1996 1997 1998 1999 2000 01 Nov 2001

foreign exchange gold

USD(millions)

Chart 2. Official Gold & FX Reserves of the Russian Federation (end of period)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1996 1997 1998 1999 2000 01 Nov 2001

foreign exchange gold

Nevertheless, the Bank of Russia attaches the most importance to the following

feathers of gold as a reserve asset:

Gold stored in the vault is not exposed to credit risk with regard to the

counterparties of a central bank.

In contrast to foreign currency assets, gold does not represent any issuer’s debt

obligations and its value is not dependent on any obligor’s financial condition.

Against the background of the recent manifestations of instability in the world

financial markets gold assets might serve as a “safe haven”.

40

The gold price trend is normally in a counterphase to the dynamics of the US

dollar exchange rate. As long as the dollar performs the role of the primary

reserve currency, holding substantial gold reserves might serve as an automatic

compensatory mechanism for keeping the aggregate value of reserves steady.

Therefore, gold fully meets the first criteria applicable to reserve assets – that

of safety.

As a rule, liquidity of gold assets falls short of that of foreign currency assets.

However, in case of a substantial instability in the world financial markets, li-

quidity of the bullion market and the value of gold go up, while the same param-

eters of some foreign exchange assets might drop quite dramatically.

Returns from active trade in gold are usually lower than those for similar foreign

exchange transactions. That said, in certain periods gold lease rates might rise

sharply, as can be seen from Chart 3. During the current year, due to the con-

secutive rate cuts by the US Federal Reserve, there has been a trend for conver-

gence of US dollar money market rates with gold lease rates.

Bullion deposits with top-rated overseas counterparties are the primary tools

used by the Bank of Russia for managing its gold assets. In order to enhance the

returns from these transactions; during the last few years the Bank of Russia has

started placing gold deposits with embedded call options. It is common knowl-

edge that such yield enhancement features may improve returns quite signifi-

cantly. Overall, according to the Bank of Russia’s experience, the profits from

bullion operations exceed by a considerable margin not only the respective trans-

action costs but also the aggregate outlays for the maintenance of the gold stock.

Alongside the external economic reasons, the Bank of Russia has some domestic

economic reasons for holding substantial amounts of gold.

Given the fact that Russia is one of the largest producers of gold in the world,

the present stage of the transformation from the centrally planned economy to

a market-based one implies that the Bank of Russia has to facilitate the develop-

ment of market mechanisms in the gold mining industry, particularly by provid-

ing liquidity to the gold market. The last few years have seen the creation of the

legal basis for an active participation of commercial banks in financing gold

mining and in trading gold. As a result, after a prolonged period of recession in

early to mid-1990s, during a more recent period the production of gold in Russia

has been picking up quite noticeably without any major allocations of central-

ized resources. Thus, the amount of gold production in 2000 exceeded the levels

achieved in the early 1990s and reached 143 tonnes as compared to 125 tonnes

in 1999. At the same time, a reliable mechanism for the accumulation of the

official reserves has been created in the Russian Federation.

For the purposes of further development of the precious metals market the Bank

of Russia is planning to begin granting bullion loans to commercial banks in the

41

nearest future. In addition to that, the gold market will take important guidance

from the plans declared by the Government of the Russian Federation to abolish

tariffs on gold exports.

Today several West European central banks pursue policies aimed at gradual

reduction of their gold holdings, transferring their funds into more profitable

investments. On the other hand, as seen from Chart 4, practically all the leading

nations of the world have large official gold holdings at their disposal. The share

of gold is similarly high in the aggregate official reserves of these countries. The

amount of gold reserves of the Russian Federation lags behind the levels ob-

Chart 3. 3-Month Gold Loan Interest Rate and Gold Spot Price

0

1

2

3

4

5

6

7

1998 1999 2000 2001

%

0

50

100

150

200

250

300

350

US

D per ounce

3-month rate spot price

0 1000 2000 3000 4000 5000 6000 7000 8000 9000

tonnes

United Kingdom

Russia

China

Taiwan

Spain

Portugal

Japan

ECB

Netherlands

Switzerland

Italy

France

IMF

Germany

United States

Chart 4. World Official Gold Holdings (October 2001)

42

served for the majority of leading industrial countries, while the proportion of

gold in the reserves is close to that of the European Central Bank (14 per cent) or

the United Kingdom (11 per cent). It is noticeably lower than the ratio for the

reserves of the United States (57 per cent), but it’s several times higher than the

same indicator for the so called “emerging” economies of China and South-

Eastern Asia (within 3 per cent).

For the reasons described above, the Bank of Russia attaches a lot of importance

to gold in the context of diversification of its reserve assets for the purposes of

lowering the respective investment risks. We are not planning to pursue the

policy of targeted reductions in the gold component of our official reserves.

43

The role of gold in Kazakhstan’s reserve management

Batyrbek Alzhanov

Director, Monetary Operations Department

National Bank of Kazakhstan

The central banks use gold as a reserve and the particularity of gold is that it is

a quality of financial funds and also is, in general, a commodity that comes

under the rules of supply and demand. The reserves that are formed by securi-

ties of foreign countries, and the measures of such countries such as the freez-

ing of reserves, are very vulnerable; gold is by far better and can always be

used. And although monetary, gold as the reserve asset is reduced in value, but

the gold reserves of the National Bank of Kazakhstan are not exposed to many

fluctuations and are 15-18% of all reserves we have. The significance of gold

means that prices fall, but compared to the fluctuations of other currencies, it

is still a reliable thing which can be easily used as a commodity by various cen-

tral banks. The present strategy, and the gold reserves of the National Bank of

Kazakhstan, is directed at increasing the active role by gold reserves, both in-

ternationally and nationally, in terms of carrying a number of products. The

entire quantity of gold as reserves is the equivalent of more than 500 million US

dollars; that is round about 50 tonnes and 73%. Abroad, the rest of the gold is

used as deposits for various periods, and different operations are carried out.

Also, the National Bank of Kazakhstan is carrying out operations to buy gold, and

also gold is produced. As far as the production of gold is concerned, after the

collapse of the Soviet Union, Kazakhstan has produced 28 tonnes of gold. We

process the ores, and Kazakhstan mines have also exported gold to beyond the

borders of Russia, after the collapse of the Soviet Union and after establishing

our own economic ties with other countries. After the economic significance,

the production of gold in Kazakhstan has reduced from 29 tonnes in 1998 to 2.5

tonnes. The state actually shut down the gold mining industry, and after the

crisis in mining in July 1995, the President of Kazakhstan signed a decree on the

state regulating precious metals and precious stones. This was the first step to

liberalise the precious metals in Kazakhstan. A government programme with

regard to mining gold, and increasing it to 50 tonnes in 2000, is one of our

priority tasks [sic].

The provisional regulations have shown that gold will still be found. We have

additional deposits but it costs a lot of money, and we want to get the money by

attracting foreign investors. We feel that we have to increase the production to

be attractive to foreign investors with the participation of Kazakhstan and for-

eign capital. It is known that Kazakhstan is one of the leaders in gold reserves;

we are position number 5 in the world. We are in the fourth position with regard

to the gold content in the tonne of ores. In the CIS countries, Kazakhstan is in

44

position number 3, after Uzbekistan. The precious metal trade in Kazakhstan is

a very prospective trade and that is why, in 1998, new legislation was enacted so

that changes were made regarding the controlling of precious metals and pre-

cious stones. Changes were also made by an order in Council with regard to

taxation. The volume of gold and precious stones mined is important and our

own banks are included in this. In spite of the drop of the gold price in interna-

tional markets, gold mining in Kazakhstan is fairly cheap compared to other

markets. In the market of precious stones and gold, we are also in a favourable

position concerning the other CIS countries.

Other legislation is aimed at attracting commercial banks and foreign capital to

boost the mining of gold and to step up the operation with precious metals. New

technologies should also be introduced in gold mining. At present, the invest-

ments of our own commercial banks are the bulk of the investments. The share

of foreign companies in developing the gold mining industry is around 40% of the

entire investments. With the participation of our own companies and foreign

companies we also have to modernise our own processing companies. In

Kazakhstan, we also established our own production, processing and upgrading

of precious metals to be present in the international precious metal market.

I would also like to state that at the end of 1991, the National Bank established

favourable conditions for credit and loan granting, also for other important raw

materials. In January 1992, we established a gold reserve and in 1993, the na-

tional currency tenges, is well, a hard currency and guarantees the sovereignty

of our country. The gold mining industry in Kazakhstan lays the accent on ex-

ports. The producers of gold and precious metals have set the following typologies:

the possibility to sell gold to the Kazakhstan banks. The producers get an addi-

tional saving due to the fact that banks actually pay for the customs and for the

transport. Products can be more quickly delivered; two days after the delivery

the gold is in place. They get additional money, and this in turn makes it possible

for us to mine more of our precious metals. The producers have enough floating

assets to keep prices stable and we get credit from banks for the floating assets.

The production can be guaranteed in the future and stepped up. The commercial

banks have now become the main credit organisations for the producers of pre-

cious metals. For mining, these banks enable us to be increasingly present in the

world gold market. We also use all the general banking instruments and all sorts

of operations that are customary, if possible. And that’s why Kazakhstan gets all

the hard currency it needs to better develop its gold deposits.

Apart from all these positive trends in the gold mining or processing industry,

there are certain shortcomings as well, let’s face it. Above all, we have high

prices for processing the ores and the metalworking industry is still too expen-

sive in our Republic. The general trend of the fall of world price of gold and the

insufficient credit taken of commercial banks for the gold mining and gold process-

ing industries is also a certain minus. But in principle, what has also attracted

the foreigners is that at present we continue to liberalise our market and in

principle there are very positive prospects to further develop the gold mining

45

industry in Kazakhstan. It is known that the basis of the ores and gold mining

industry in Kazakhstan are the deposits. (Three gold deposit locations are listed.)

This is where the deposits are located and this is what we want to make use of

further. We have a confirmed programme to develop the gold mining industry;

this plan is up to 2003. It should increase by 20,000 tonnes the amount of gold in

Kazakhstan. We used to have a different programme by 1995 but the National

Bank of the Republic of Kazakhstan, the initiator and active participant in the

Kazakhstan market, has asked us to do the trade with precious metals. The

National Bank has also attracted various other Kazakhstan commercial banks,

and together they fund the development of the mining companies. The objec-

tive is to increase the gold reserves of the Central Bank. These are 15-18%, they

are kept the same and the quantity is reserved but the Central Bank also buys

the gold in our internal market. Based on this, they also carry out operations in

international markets.

In the conclusion of my paper, I should like to stress that since we have estab-

lished a gold reserve we have had very positive trends in legislation as it con-

cerns all the operations of gold mining. We have witnessed a complete liberali-

sation of the gold trade, so we have very favourable conditions in Kazakhstan to

attract foreign investment based on the work of commercial banks and to in-

crease activities. Small businesses also get a chance to take advantage of minor

deposits.

46

Questions:


Chair: Thank you very much. I’m sure there’s lots of interest. We’ve seen differ-

ent perspectives on the use of gold, where it comes from, who’s financing it and

who’s using it in Eastern Europe. Open to the floor – any questions please.

Questioner: My question is to Mark Rachovides. Could you tell me more about a

little bit more about production sharings and developments in Eastern Europe?

(This is an approximation made from the answer. The questioner was off mic.)

Mark Rachovides: Thank you, Gerry. Production sharings are a technique that

have been employed in several countries, I think most successfully in the oil

sector in Russia. They are operated in the gold sector in Indonesia, for example.

They are essentially an arrangement that vary from the traditional joint/ven-

ture style partnership, whereby production rather than dividends are shared.

Production sharing agreements tend to be cast in bespoke taxation arrange-

ments. The idea of that is that they provide certainty in cash flow and in terms

of expectation of fiscal costs. Bankers like this sort of thing because they are

easier to finance. For gold mining companies, they tend to represent a decision

because, of course, the fiscal environment could get better rather than the

present environment. You could find yourself disadvantaged. We’ve financed a

very large PSA arrangement in the oil sector of Sachaleen Island, which has

proven to be very successful. As yet in the former Soviet Union, there are no

operating PSAs. There are several that are quite well known, we’re certainly

following their progress actively.

In respect to Uzbekistan, as I mentioned in my presentation, the largest foreign

investment is by Newmont Mining Corporation in Zarafshan-Newmont. The larg-

est mine, however, is run by the state owned Navoye Kombinat, which is the

Muruntau open pit. That does not have any foreign investment but is one of the

largest, and arguably the largest, open pit gold mine in the world. There are

developments that have been relatively well publicised – some of you may have

read articles, for example, in the Wall Street Journal last week on potential for

further investment in Uzbekistan. Most well known is the recent development by

Oxis Mining of the UK of the Amuntetau Heat Leach Project. Further, Newmont

are exploring a new project in the Angren region, close to Tashkent, potentially

a very large mine. And the Australian company, Multiplex Mining, are looking at

the very large Zamitan deposit, close to Samarkand. Potentially we hope that

one of the spin-offs of the current conflict will be that there will be greater

attention to supporting foreign investments by the United States, I’ll be entirely

honest about it. We believe that Uzbekistan has a proven track record of deliv-

ery; gold can be exported without hindrance. It is, of course, a difficult place to

work but we believe, as I said in my speech, that it has tremendous potential.

47

Chair: Thank you very much for that extensive answer and response to the query.

Any other queries, please?

Questioner: Robert Guy, wanting to ask about the role of the commercial banks.

Mr Alzhanov talked about the liberalisation of the market and the increasing

involvement of the commercial banks. Mr Sokolov also talked about (not on

tape)…the gold loans to commercial banks to help them assist their business. If

either of the gentlemen would like to expand on the role of commercial banks,

I would find that interesting. And I’d also find Mr Rachovides’ comments inter-

esting on this because in talking about the investment of the EBRD, this has all

been, principally as I understood it, in various gold mining projects. What I’m

asking is: does the EBRD envisage a more active role vis-à-vis those commercial

banks who themselves are specialising in gold mining?

Mr Rachovides: EBRD does have some experience of supporting commercial banks

in Russia. Immediately following the 1998 financial crisis, EBRD intervened to

provide some gold financing, principally for alluvial miners. It’s a small scale

operation but we do have some experience of it. In terms of more forward look-

ing schemes, areas we’ve looked at basically amount to credit enhancement.

Could EBRD or another multinational, for example, intervene to mitigate the

credit risk or the political risk that may confront a commercial bank, particu-

larly an old bank, in dealing with a Russian or a CIS counterpart? Indeed, it is

something we are exploring. It does, I think, require from our perspective con-

siderable co-operation with institutions such as those represented by these gen-

tlemen. And also, indeed, considerable legal due diligence but it’s an area we

are certainly exploring our interest in pursuing.

Chair: Thank you, Mark. Vladimir, would you like to respond?

Mr Sokolov: As I mentioned, the Bank of Russia is planning to grant bullion loans

to the commercial banks and then we hope that they will invest their loans to

the gold producers. As a central bank, we see our role as not being active on a

daily basis in the precious metals market, but we should do everything to sup-

port our internal producers during our transition period in our economy. That is

why we decided to issue this legal document, which is providing the opportunity

for granting loans to the commercial banks. Thank you.

Chair: Thank you. Mr Alzhanov.

Mr Alzhanov: As I already said, the Kazakhstan market is completely liberalised.

The National Central Bank of Kazakhstan supports the commercial banks and it

makes their job more active with regard to funding the gold mining industry. At

present, we have some 10 banks in Kazakhstan that have a licence to carry out

operations with precious metals. As I said, the Central Bank wants to make this

market of commercial banks more active and to act as a role model. And they

also participate in certain projects, together with commercial banks in

Kazakhstan, to fund the gold mining industry. Another thing is; that the Central

48

Bank cannot constantly co-fund these operations because our Central Bank has

got a different function. Basically, we want to support our national currency. But

to render support and as a role model, the Central Bank participates in some

operations. In the long run, after two years I think, we will have large Kazakhstan

investors, among them our own commercial banks.

Chair: Thank you very much, Mr Alzhanov. Further questions. Yes, here.

Questioner: Alexander Shorov, National Bank of Ukraine. I’ve got questions for

each of the panellists if possible. First of all for Mr Rachovides: in your speech,

you mentioned a lot of Eastern European countries like Uzbekistan, Kyrgyzstan

and so on. Ukraine is East European, or rather a Central European country, or in

any case, a country of operation. We’ve got some gold deposits in our land as

well, estimated in hundred tonnes. My question is: does the EBRD have some

analysis, a due diligence report, about Ukrainian gold mining prospects and if

so, what do you think about these prospects? Second question, for Mr Sokolov:

does the Central Bank of Russia make intervention in your domestic gold market,

and if so, what is your official price, compared with gold fixing, for example?

And one question for Mr Alzahnov: if you do not mind, I want to ask again, you

said your market is liberalised and you spoke about the role of your commercial

banks. But the banks actively participate in the gold mining as such? I did not

quite understand it, although I know your market a little bit. Do you also have a

gold stock exchange, only for the internal market or also internationally? Can

others also buy some there?

Chair: Mr Alzahnov is not the only person here who will be speaking in Russian! Thank

you very much for the three questions, and let’s take them in that order, please.

Mr Rachovides: Certainly. I acknowledge the gold mining potential of the Ukraine.

We do have proven reserves, and as I mentioned in my speech, as part of the

former Soviet Union, it’s a very well explored catalogue and we have an excel-

lent tradition of engineering. We have not financed any projects in gold mining

in the Ukraine, and there is certainly no prohibition to us doing so. We would

welcome a dialogue on that subject. In terms of any available information, not

specific to the gold industry, I would recommend you the forthcoming World

Gold Council publication, “The Golden Road”, which does have a competence

section on Ukraine. In terms of our own literature, obviously EBRD has a wealth

of country data, but no, we have not undertaken an EBRD funded study of gold in

Ukraine.

Chair: OK, thank you. Mr Sokolov.

Mr Sokolov: I can answer that the aim of Bank of Russia is to create liquidity in

internal precious metal markets. Since the last two years, we are not so active

in providing operations in the internal market. For this year, for example, the

volume of operations, I mean the buying and selling, is less than 10% of the

volume of our internal market. When we quote the gold price in our internal

49

market, we use the London fixing rate. In correspondence with the size of the

export tariffs for gold in Russia, it’s 5%, plus export costs. That’s why we usually

quote the purchase price as gold fixing, minus 5.5%. Thank you.

Chair: Professor.

Mr Alzhanov: As regards your question, let me more narrowly define it again.

Until 1995, that is until the liberalisation of Kazakhstan took place and when we

actually established a stock exchange, anybody was more or less allowed to get

some gold. But this gold was basically bought by the National Bank, and if the

National Bank did not want to buy gold, only then could the commercial banks

and other buyers buy the gold. But beginning from 1998, the market was liberal-

ised again. It’s now completely liberalised; now we haven’t got such a sort of

stock exchange. Before, we had this system of priorities and we had this sort of

stock exchange, but it makes it more difficult for the producers to attract inves-

tors and the Central Bank in Kazakhstan bought the gold at fixed prices in keep-

ing with what I said. Now, the gold market is totally liberalised, the commercial

banks also fund the gold mining and gold is then the property of the bank. The

gold obtained by the commercial banks is basically exported; it is not sold by the

commercial banks on our home market, like I said. We also pursue a number of

projects where the Central Bank of Kazakhstan is one of the participants in

carrying out those projects. In such a case, then the National Bank has the obli-

gation, and the gold producers are obliged to sell the mined gold to the National

Bank at world market prices. But basically all the gold produced is exported.

Chair: Thank you, Mr Alzhanov. And thank you for those questions. Further ques-

tions? Yes.

Questioner: Thank you. My name is Murray Pollock, from Toronto. I have a ques-

tion regarding your bank, Mr Rachovides. You made reference to loaning only if it

made economic sense, and then you also made reference to new projects. Are

there many new projects that make economic sense in view of the current low

gold price? And that would apply to the whole region. Thank you.

Mr Rachovides: There are some extraordinary advantages to doing business in

Eastern Europe and the CIS. As several people have found, there is a wealth of

human resource, as well as mineral resource, which renders the cost base appre-

ciably lower and provides better value than many alternative locations. As a

counter to that, politically there are risks that can translate into fiscal costs. So

if you like, the equation of, “When does a project make sense?” is slightly differ-

ent in the CIS. Yes, I agree entirely, the low gold price has subdued the number

of viable projects. We are, of course, examining projects everyday, and I do

believe that there are a number of new projects that show good potential in the

CIS. I haven’t mentioned, for example, countries like Bulgaria and Romania pre-

viously, and we do follow developments there closely. We’re certainly excited by

the recent developments of mineralization in Bulgaria, for example. Yes, we

believe potentially, and I would say, with the assistance of a slightly improved

50

gold price, that there are a number of new projects throughout our region that

show potential.

Chair: Thank you, Mark. I think our two central bankers don’t need to respond to

this particular question. Further questions? Fine. Well, thank you Ladies and

Gentlemen.

51

The role of gold in the international

monetary system

Introduction by Dick Ware

I’d just like to outline very briefly the next session. This morning we had some

practical messages as to how some central banks in this part of the world deal

with their external assets. This session will deal with perhaps somewhat more

theoretical concepts.

First, Professor Mundell will give his views on the ever-evolving international

monetary system. Might there be some sort of competition among the main

currencies to be held in central bank portfolios or are there more fundamental

factors involved in central banks’ decisions? Where, if anywhere, might gold fit in?

Next comes Giacomo Panizzutti, who is extremely well-placed to give his views

in this field since the BIS acts as agent for a large number of central banks.

And, last but not least, is Michael Kuhn from the IMF. The issue of IMF quotas has

always been contentious as it defines rights and duties in the Fund. The formu-

las deriving quotas are complicated. But there are thoughts that they might be

changed. In the context of this conference, which is dealing with the system

and with reserve assets, the importance of reserve assets in quota formulas is,

obviously, vital. Although it may appear an esoteric subject, it is in fact one of

very practical significance to every IMF member and the IMF has 183 members,

virtually every country in the world.

Finally, a few thoughts of my own before I give the podium to Bob.

The international monetary system as it exists at the moment is paper-based.

Reserve asset managers have a basic choice between dollars, euros, yen, ster-

ling and Swiss francs. Can anyone forecast the future to the extent that they

can choose the correct mix among these currencies? (I am of course assuming

that there is no credit risk with such AAA currencies; but that would be a wrong

assumption, I think; and we have already seen how Japan is no longer AAA.

I am sure that you know the arguments already – and my colleague Rob Weinberg

will expand on them in the next session – but gold has a negative correlation

with virtually any other asset and a percentage should therefore be held. This is

a fact which is true not only for the official but also the private sector.

But I would like to go further.

52

Given that it is important that countries hold an element of gold in their overall

reserve portfolios, which is something that was confirmed by Hans Tietmeyer

this morning, there may be another way in which gold could benefit certain

countries via their exchange rate arrangements.

I have spoken about this on several occasions in the past, and I won’t bore you in

great detail. But the point is that, for certain gold exporting countries – those

for whom gold represents a significant proportion of their exports – it might

make sense for their currency arrangements to reflect the importance of gold to

their economy.

In South Africa, the US, Australia and Canada it goes without saying that gold is

important in its own right. But as part of such countries’ overall economies it

may not register terribly highly.

But for smaller countries the situation may be different.

The current IMF Articles prevent a country pegging its exchange rate to gold and

even, it appears to a basket including gold, though there are some arguments

against that supposition.

World Gold Council research will soon be forthcoming with good reasons as to

why IMF Article IV2(b) should be amended. The inclusion of gold in a basket

which anchors an exchange rate may not be appropriate for many countries. But

for those countries where it suits, there should certainly be no prohibition against

applying it.

Here endeth the lesson. I now give the podium to Bob Mundell.

53

The future of the euro, the dollar and gold

Prof Robert Mundell, Nobel Laureate

Great pleasure to be here again and to talk about the international monetary

system. In the background of the system are a number of trends, forces that are

part of the landscape in which that system acts. The “new economy” is going

ahead, despite the recession we’ll come out of the slowdown with a new level of

productivity and growth. With globalisation a factor around, we’ve got the US

economy, which for the past two decades has been the motor of growth in the

world economy, now entering a period of slowdown. And then we have China’s

economy, which has come into the forefront, and only in the recent few days

from Doha we have China’s entry into the WTO system, and also Taiwan’s entry a

day later into this system. And then in the background of all that, we have the

advent of the euro and the fortunes of the euro. The euro becomes an important

player in the system.

So with that landscape, we look at what is sometimes called, rather optimisti-

cally, the international monetary system. It’s not really a system; it’s really the

absence of a system. We had a system before 1971 and even for a couple of

years from 1971-3 there was an international system, but the movement to

flexible exchange rates ended the system; there’s no system. There’s now an

arrangement of national currencies, maybe 200/190 national currencies col-

lected together in groups and currency areas, and other currencies floating or at

different stages of control. But within that, we look for strong cases and uni-

formities, and we find of course the dollar, euro and yen areas. You measure the

importance of currency areas by monetary mass and monetary mass is more or

less proportionate to GDP. The GDP of the United States is 10 trillion dollars,

that of the euro area is 7 trillion dollars and that of the yen area in 4.5 trillion

dollars. Go next down the list to the next largest currency area, you come to the

pound sterling, 1.5 trillion dollars of GDP and then Russia fits in somewhere, I’m

not quite sure where, but anyway China comes in at, recently, 1 trillion dollars.

So the dominant forces in the world are clearly these three large currency areas:

10 trillion, 7 trillion and 4.5 trillion, and anything that occurs, any major reform

or change in what we might optimistically call the architecture of the system,

whatever that term means in this context, has to do with the exchange rates

among those three areas.

Well, everything moves over time and evolves, and the law of growth of econo-

mies and currencies is change. We can see the euro area expanding; we could

imagine in 2 or 3 years time Britain, Sweden and Denmark in the euro area. We

could imagine in ten years time another 10 or 12 countries, accession countries,

in the euro area. So that in a dozen years, the euro area would comprise coun-

tries, maybe 27/28 countries with 500 million people and a GDP potential of

54

about 20 or 30 or 40% higher than the dollar area. So the significance of the euro

is that, when it was created it became the number two currency in the world

and it has the potential for changing the power configuration in the system. You

have to look upon the international monetary system partly as a kind of oligopoly;

if you think of the money industry, you have one big firm and some groups of

smaller firms that are still large but combine together to contest the leadership

of the first, and then a lot of other smaller firms in it. That element of oligopoly

characterises the international monetary system too.

With the creation of the euro, you get another big zone of monetary stability.

And it is stable; the dollar area is stable and the yen area is stable to some

extent. Although the yen area might be too stable, there’s too much control of

inflation, prices are going down there, there’s too much deflation in Japan. But

nevertheless, there’s no inflation in any of these three areas and the addition of

the euro area helps by creating an alternative to the dollar, creating another

area of potential stability. However, the big problem is the instability of ex-

change rates between these areas and this is the source of a great deal of diffi-

culty. Question: should Britain join the euro area? Well, if you could imagine that

the dollar/euro rate was going to be as unstable in the next 4 or 5 years as the

DM/dollar rate has been over the past 25 years, you’d have to say “absolutely

no”. Because 25 years ago the dollar was 3.5 DM, 5 years later it was half that,

1.7, 5 years later in 1985 it was 3.4 DM and 7 years later in 1992 it was 1.34 DM

below that, and now it’s 2.2 DM. You just see that big movement of instability

and if anyone said that the dollar/euro rate was going to be anything like that,

how could an economist ever say that Britain, which is sandwiched in between

these areas, should join the euro area or the dollar area? You’d have to sort out;

what’s the cause of this gross instability especially between currency areas that,

at least currently, have about the same rates of inflation. Why do you have huge

changes and swings in the exchange rates between these areas?

Well, if you find out the cause of the instability is that one area is always unsta-

ble; if the dollar area is always unstable, Britain, if it joined anything, should

join the euro area. If the euro area’s unstable, Britain should join the dollar

area. Or if both areas are unstable, or they’re mixed, it should stay apart. So

that’s the way I would answer the question about Britain. Yet I believe that

Britain really belongs to Europe and it would be better if Britain would come into

Europe. And I do believe that the dollar/euro rate in the future is not going to be

as unstable as it has been in the past. It’s turned out to be a blessing for Europe

that the euro is now ninety cents rather than a dollar eighteen. It’s help to

sustain European growth over this period. I think if the euro had been again a

dollar fifteen, Europe would have gone into the recession a lot earlier and quicker

than the United States even. But the depreciation of the euro has really been a

blessing in disguise.

Currency integration has turned out to be a great blessing for Europe. I think

every country in the euro area now has a better monetary policy than they had

before. Every person in the euro area has a more important currency than they

55

had before, they’ve got the number two currency in the world with the brand

name recognition it will have when it’s created in a few months all over the

world. You no longer have wage pressure against currencies that way you had

before when the exchange rate was always a hostage for wage expansion. And

you have the transparency of pricing and those things that exist. And for those

countries that have histories of monetary instability in the south of Europe;

Spain, Italy, Portugal and Greece, that had ten years ago interest rates of 10-

15%, now have interest rates below 5%. An enormous saving on the interest

payments on the public that, and a big reduction on the costs of capital. All

those countries now have a unified capital market in Europe. So these are enor-

mous blessings that have come about for Europe. Europe is a great experiment.

Even for Germany; I say that Germany has a better monetary policy than it had

before not because the Bundesbank was poorer than the European Central Bank

but because of the isolation of the German currency, it became a kind of trophy

currency, an investment currency. It always created the tendency for it to be

overvalued rather than undervalued. It was only by linking up with its neigh-

bours that it could get its currency down and would make German industry much

more competitive than before.

Now we’re in this period of slowdown and the recession has started in the United

States. The US has had a remarkable swing; since 1982 the US has been in con-

tinued expansion up to the first half of the current year, except for 9 months of

recession 1990-1, three quarters of recession. Since 1982, the US economy has

been continued expansion. Over that period it has created 41/42 million new

jobs, more than the entire labour force of the complete German economy. So

this is a remarkable change. That’s come about in large part because of the

supply side revolution in the 1980s, which brought tax rates down in the 1980s

from a top rate of 70% at the federal level alone, down to 28%. And a corporate

tax rate from 48% to 34%. And a capital gains tax rate, which was in the 1970s

something like 48% is now down at 20%. So the US economy has become much

more efficient. There was some backsliding on these supply side majors under

the first Bush and Clinton administrations but the top marginal tax rate is still

39.6%, no longer 70%. The US economy achieved the benefits of this; they also

deregulated labour markets, they deregulated a whole range of processes. They

had a genuine supply side revolution, which is about maybe one third of all the

things they should have done, but that one third was enough to make it among

the most efficient economies in the world.

Meanwhile in Europe and Japan; these economies had been the star performers

of the 1950s and ‘60s with zero unemployment rates, or two or three percent

unemployment rates, and rapid growth rates and strong trade balance surpluses

over this period. The United States was withering under excessive unemploy-

ment, sluggish growth and some creeping inflationary pressure and the balance

of payments deficit, and was the almost basket case. It was, of course, the

richest country and the other countries were catching up. You have a complete

reversal of fortune in the last two decades with the US as star performers and

the European and Japanese economies in the background. Europe has to have a

56

supply side revolution; I think that’s the path that Europe has to take – freeing

up its labour markets, getting rid of that tax system that taxes labour at almost

60%. In Italy, labour is taxed at 59% automatically so that if an employer pays

100 units to a worker, 59 of those go to the government and only 41 is left over

for the worker. This creates the underground economy and the malaise that

exists in the European economies now. It’s not just a slowdown for Europe, it’s

the need to recreate and reform and regenerate the youthful economy that

countries like Germany, Austria and even Italy had in the 1950s and ‘60s. It’s

hard to do that though because in the 1950s and ‘60s, government spending in

Europe was something like 25-30% of GDP and now it’s over 50% of GDP. You’ve

got so much government in the system, and so many social programmes that are

hard to sustain and were put on when there were 4 or 5 workers for every pen-

sioner. Now, as we move with the demographic revolution, there are to two or

three, or even in the future maybe 1.5 workers for every pensioner; an unsus-

tainable system. It’s no longer going to be possible to have, as you do in Italy,

people retiring at the age of 55 when they live to be 85 in that rather healthy

country. You have to change those fundamental things and it’s not a matter of a

quick fix. It’s a matter of long run, hard work, more liberal policies in the Euro-

pean sense and getting back to free market policies.

What about macroeconomic policies? Well, Europe created so much debt in the

1980s and ‘90s that the debt/GDP ratio in Europe went over 70% for the Euro-

pean Union as a whole. Remember when Maastricht was negotiated in 1991, the

debt/GDP ratio was 60% and that was the target for each country. But by the

time the euro came into being, it was 72/73% so that’s a major problem for

Europe. The implication of that, which was not really thought of much then, is

that there is no possibility of any kind of macroeconomic fiscal policy in Europe.

Even if you had a Secretary of State that could manage European fiscal policies,

there’s no conceivable Keynesian type policies that would have any benefit at all

because every increase in government spending or tax cut that was involved

would have to be matched by an issue of bonds to finance that. So any stimulus

you’ve got in one direction would be taken away in another direction. The mul-

tiplier, in short, in Europe is zero. It’s a little bit the same also in the United

States; its tax reductions that it’s undertaken will have some supply side effects

and it will have a modest effect on the economy. The programmes that are being

talked about for giving money away, a rebate to everybody, some people will

keep up their spending with it but a lot of people will just repay debt with it and

it won’t go into the spending stream, and it’ll increase the deficit or decrease

the surplus and there won’t be much benefit to that.

We’ve got to a stage where we have monetary policy but in the case of fiscal

policies; if fiscal stimulus ever was a remedy, the remedy has disappeared. There

isn’t much to be said in that respect. Even in monetary policy now, interest rates

have come down in the United States from 6% down to 2%, an absolutely aston-

ishing reduction in interest rates and that’s certainly helped to sustain the hous-

ing market and some things like that, but it hasn’t prevented the economy from

going into recession. And the additional scope for further movements in that

57

direction is quickly disappearing. In Europe, the interest rates started 1.5/2%

points lower than in the United States, and Europe was therefore slower in re-

acting and getting its interest rates down. It’s inhibited from doing so because it

just cannot afford, under its current mandate, to let interest rates get too low

and let the euro tumble below 85 cents and awaken inflationary pressure some-

where down the line. The tools really have gone out.

If we look ahead, along the future, we see the US current recession. The most

optimistic prediction I’ve seen of it is that it’ll hit bottom by the second quarter

of next year and the third quarter will see positive growth again. This current

quarter, the third quarter, was negative growth and if the next quarter is nega-

tive growth and the first two quarters of next year are negative growth, that’s a

full year of negative growth, which makes it a steeper recession than that very

demoralising recession of 1990 and 1991. That recession was very demoralising;

it was the first computer recession. The computer replaced one whole tier of

middle management and it was a depressing recession because it hit educated

white collar workers that always thought of themselves as being protected be-

fore. This one could be, therefore, worse. The IMF yesterday came out with a

forecast for growth for the United States of 0.7 or 0.4%, something like that,

anyway less than one percent for next year, which is a very depressing phenom-

enon, especially coming off the highs of growth of 5% on the average from 1995-

2000. Remember, suddenly in 1995, the fruits of the computer/IT revolution

combined clicked in and productivity jumped, growth jumped, from 2.5% to 5%.

That was a wonderful kind of growth because it was connected with very low

inflation and with a decreasing deficit and a rising surplus over time. So every-

thing that looked rosier then doesn’t look rosy any more.

The fact is that at a certain point, the US and Europe, there isn’t much they can

do individually to cope with this slowdown recession next year if it turns out

much worse than people expect (and that’s a definite possibility). Is there much

they could do together? Directly not; it’s hard to see them sitting down and

agreeing either on fiscal policy majors or joint monetary policy majors that

would really going to do much good. Europe is going to be worried too much

about pushing too hard on the monetary string without that weakening the euro

further. My own view is that what we need is now a joint policy; we’re missing a

tool in the whole apparatus of the world economic structure, a tool that we had

when we had an international monetary system. Whenever there is an interna-

tional monetary system, there is always a concern about global liquidity. And the

IMF in the 1950s and ‘60s would come out with reports of global liquidity and

there was a provision every five years, a quinquennial review, of quotas. A world

currency was created with the SDR; the SDR was a gold substitute because the

SDR as it was created was defined in terms of the 1944 gold dollar, one thirty

fifth of an ounce of gold. When the prices rose as they did in the 1970s, oil prices

went up and the gold prices shot way up, what did the IMF do, what did the

members of the IMF do? Well, they stripped away the gold guarantee from the

SDR and they made the SDR powerless, they killed it, they killed the SDR as a

reserve asset. I think it was a mistake, I also think it was illegal because it was a

58

treaty and it was never repudiated in a sense. It might be a matter of dispute

whether the second amendment made it legal or not. But when it was done it

was an illegal act.

What I would do, would be to have an issue of some unit of purchasing power,

and I would call them as I did in a plan I had for world currency in 1948, that I

gave to Congress, the “intor”, using the French word for gold for the last part of

it. And define that as the 1944 gold dollar. What I would propose then is an issue

of “intors” that are the original SDR as defined by the first amendment of the

articles of agreement as one-thirty-fifth of an ounce of gold and have an issue of

let’s say for a start, 50 billion intors. That would be a big amount in the world

economy. It would be something like 400 or 500 billion dollars of purchasing

power. With that instrument delivered into the system, you’d then have the

basis on which countries would feel much more comfortable with expansion in a

wide range of different things. It would create the opportunity for countries to

all have increases in exports at the same time. So that would be the way in

which I would go.

Thank you.

Chair: Thank you very much, Bob, for a very useful survey, I think, of the current

economic scene. As I said earlier, if people would like to ask a question or two of

Bob at this stage, we will have general questions at the end and I’m sure Bob will

still be around if you’ve thought of something between now and then, but if one

or two of you would like to ask a question now, please do.

Questioner: I’m from the Bank of Japan. I’d like to raise one simple question:

Professor Mundell, do you think there should be a single currency like the euro in Asia?

Professor Mundell: That is a very important question, and I wish I could give a

short answer to it!

The answer is “yes” to the question of the need for a currency in Asia, but

probably no to a single currency. Asia has a far lower degree of political integra-

tion than Europe and some degree of political integration is absolutely essential

before moving toward a single currency. I don’t think that there is anything like

the degree of institutional development or political integration necessary to

have countries scrap their own currencies and replace it with a single currency.

At the minimum, you would have to establish Asia as a security area, i.e., a zone

in which war is absolutely ruled out. Europe has a higher degree of political

integration than Asia and is even contemplating working together on defence

and foreign policy arrangements, and that makes it possible for the European

countries to achieve a single currency. It imposes to a certain degree some ir-

revocability and irreversibility.

Nevertheless I do believe Asia desperately needs a common currency in order to

defend itself against the instability imported from large fluctuations in the dol-

59

lar, euro and yen exchange rates. By a common currency, I mean just that, a

parallel currency that the countries used in common, but does not involve going

to the almost irrevocable step of scrapping their national currencies. Each of

the national currencies in Asia could be linked or even locked to a common Asian

currency and the size of Asian trade would be such as to make that an important

element in the world monetary system.

I am aware of course of the difficulties of finding the leadership in Asia that

would enable the creation even of a parallel currency. A natural start in this

connection might be the so-called “APT” group, the now-ten ASEAN countries,

plus three—Japan, South Korea and China. That group could in principle be the

framework for creating the common currency. But even APT has great problems.

Frankly, the issue turns partly on relations between the two superpowers, Japan

and China. Could they consent to the high degree of cooperation needed without

worrying about the issues of control, dominance and future security. Yet you

could hardly have an “Asian” currency area without including China and Japan.

I have recently come to a little change of mind on this subject. I think it might

be better to start with a different framework, even larger than APT. I was last

month invited to speak at the APEC CEO meeting in Shanghai, and I had the great

advantage in being “positioned” to speak just after President George W. Bush,

and so I had a great audience! I talked about the possibility of an APEC (Asian

Pacific Economic Cooperation) currency. To be sure monetary cooperation is not

strictly on the APEC agenda, but I nevertheless introduced it. APEC seems like a

very large area because APEC would count not just the APT countries, but also

Taiwan, Russia, Canada, the United States, Mexico and other coastal Latin Ameri-

can countries. The more I thought about an APEC parallel currency the more I liked

it! It would finesse the political problem of APT and because it could include the

dollar and the ruble and the peso as well as the yen and the yuan, it would be

much more multinational. It would also help to solve the problem of Russia, a

country which, at least for the time being, is excluded from the euro area.

The natural currency leader in the APEC currency area would be the dollar. Now

I am not suggesting an APEC dollar forever. We have to be aware of the potential

difficulties of fixing to a floating dollar. But the only feasible way to get the

system going in the near future would be to base it on the dollar. The dollar itself

is (or was!) the “ghost of gold” and an APEC currency, should there prove to be

sufficient political demand for it, would be the “ghost of the dollar.” An alterna-

tive would be a basket of the dollar and yen (or the dollar, yen and euro, or the

dollar, yen, euro and yuan), but I do not believe that would be negotiable given

the present state of the Japanese economy.

I should make clear that, except in one case, I am not advocating dollarization.

Each country keeps its own currency but uses the ASEAN currency for interna-

tional purposes, and it keeps its own currency fixed to the ASEAN currency which,

for the first phase, will be the US dollar, just as Hong Kong, China and Malaysia

keep their currencies fixed to the dollar at the present time.

60

I am not an advocate of dollarization in general as a means to monetary stabil-

ity. Monetary stability implies a whole range of policies that are essential, and

dollarization, without those other policies being instituted, would not work. I

know that many economists think that dollarization will bring about or force

monetary and fiscal discipline. But if the political will for monetary and fiscal

stability is not there, even dollarization will break down. If the political authori-

ties insist on spending measures that cannot be sustained by the tax system, the

buildup of debt will eventually lead to a choice between default or abandoning

dollarization and as often as not the latter will be chosen. I am not saying that

dollarization will not be successful in some cases, but only that it is not a pana-

cea where the underlying political will to balance the budget is lacking.

Having said that, however, there is one exception I would make. In countries

that have demonstrated that they have the political will to achieve fiscal bal-

ance and monetary balance, dollarization might provide the “icing on the cake”

that is otherwise lacking. Countries that have been successful in maintaining

currency board systems, for example, and have at the same time kept fiscal

discipline and not allowed debt levels relative to GDP to soar, might very well

gain from the extra security and confidence that dollarization could provide.

This would be most apparent in the case of small countries where the seignorage

cost is unlikely to be excessive.

An excellent case in point is Hong Kong. If you dollarised Hong Kong, you’d

suddenly have in Asia a rock-solid currency in Asia that would be a reference

point for New York interest rates, and it would greatly assist in furthering the

goal of a future APEC currency. A currency area that included the United States,

Japan, China, Russia and perhaps Canada, Australian New Zealand, the ASEAN

countries and several Latin American countries would be by far the largest cur-

rency area in the world and would account for well over half of world output. It

would not only be of great assistance to Asia and North America but it would

contribute to the stability of the world monetary system.

It was remarkable to witness, at this APEC meeting in Shanghai in October 19-20,

2001, a continuation of the love affair between Bush and Putin, and China’s

remarkable stress on cooperation with the United States in matters of econom-

ics, finance and politics, as well as Japan’s continued interest in furthering open-

ness in trade and financial cooperation.. It could not have been predicted before

the September 11 attacks, and it represents a whole new ballpark for global

cooperation.

To summarize my long answer to your very important question, I should say that

the most feasible route to creating an Asian currency lies in first establishing a

currency area of fixed exchange rates among the major APEC countries with the

dollar as the pivot for convergence of their economies. In the process of creating

that convergence, an APEC Monetary Fund devoted to support of the fixed ex-

change rate systems would be possible and desirable, modelled, perhaps, partly

on the basis of the Bretton Woods arrangements established in 1944. After con-

61

vergence is established, alternatives could be considered that would, if judged

necessary, generalize the dollar anchor to include other relevant currencies that

would provide protection against the possibility—perhaps remote at the present

time—that the dollar would become unstable.

I know all this sounds radical if not utopian today. But once one considers the

real benefits for Japan and the rest of the world that would result from stabiliz-

ing the yen-dollar exchange rate, the approach starts to sound practical. If the

yen-dollar rate were fixed, joining China, Hong Kong and Malaysia, much of the

battle would already be won. The advantages to Russia and Mexico of entering

this stable currency area would become apparent, once their economies had

been brought into the fold of monetary stability. In my opinion, we will hear

more about this issue at the next APEC meeting, which will be held next Novem-

ber in Baha California under the auspices of APEC’s new presidency, which is

Mexico.

Chair: Thank you very much, Bob.

62

The BIS and gold

Giacomo Panizzutti

Head of Foreign Exchange and Gold

Bank for International Settlements

This document represents exclusively the views of the author and should not be interpreted as

reflecting those of the Bank for International Settlements or the official sector.

Mr Chairman, Ladies and Gentlemen. It is a great pleasure to be with you at this

conference and I am grateful for the opportunity to offer some thoughts about

the gold markets. The World Gold Council suggested that I talk about the BIS

and Gold. On reflection I felt that I should expand my presentation and talk

about a couple of subjects which I hope are of interest to all of you. Today I

would like to say a few words on:

The outlook of gold as an Asset Class

The 1999 Central Bank Gold Agreement

The BIS and Gold

The outlook of gold as an Asset Class

When addressing the issue of Official Gold as an Asset Class the first question has

to be:

- should gold be judged by the same criteria as other reserves?

If the answer is no, then the issue simply fades away and the central bank is only

left to determine what the optimal percentage of gold might be and, possibly,

whether they wish to make a return by investing a part or the whole of their gold

holdings. If, on the contrary, gold should be treated in the same way as currency

reserves then the question in which Asset Class it should be allocated is justified.

Let me tell you straight away that, in my opinion, official gold reserves should

be treated by central banks quite differently than currency reserves and they

should therefore be allocated on an Asset Class on its own.

Some of you may not be very familiar with the gold lease markets. Therefore,

before explaining why I believe that gold need to be treated differently than

currency reserves let me just spend a few minutes on the subject.

Essentially there are three major and distinct participants in the gold deposit

market:

63

©2

00

1

Ba

nk

for

Int

ern

ati

on

al

S t

Gold Market Liquidity

BANK FOR INTERNATIONAL SETTLEMENTS

Central banks looking for a return on their gold reserves by lending them, gold

mining companies who need to borrow metal to use in accelerated supply pro-

grammes and, in the midst of these, the “bullion banks” which manage the

credit risk between these sectors and often run mismatched tenor deposit books.

Another minor class consists of participants taking some speculative short posi-

tions and consignment stock holders.

Central banks add liquidity to the market either by gold deposits - where they

take full risk on the commercial banks to which they typically lend – or in the

form of swaps where central banks lend gold and in return receive an amount of

currencies. In a gold deposit there is obviously a flow of principal from the

lender to the borrower. At maturity the principal is returned to the lender along

with the accrued interest, which is payable either in gold or in currency.

Back in the late seventies some of the more sophisticated central banks started

to place, in a very low scale, gold on deposit. At that time producer hedging was

very limited and the demand for gold loans was therefore small and mainly

concentrated at the very short end. This was reflected in the interest rates,

which, at that time, were fluctuating between ! to " per cent p.a.

64

During the subsequent years demand by producers expanded very rapidly. As a

consequence official sector liquidity increased from 900 tonnes in 1990 to 2,100

tonnes in 1995 to reach 4,700 tonnes in 2001 – an increase of more than 500%

over a period of ten years. It is estimated that a further 500 tonnes of gold is

lent from private stockpiles.

Not only has there been a growing tendency for central banks to lend gold but

tenors have been increasing over time as well. Traditionally, central banks have,

and to a lesser extent still are, lending some of their gold for relatively short

periods - often not exceeding 12 months. Over the past couple of years there has

been a growing tendency for central banks to lengthen their maturity profile to

take advantage of the pick-up in yield.

It is believed that the 1999 Central Bank Gold Agreement may have resulted in a

fundamental change in the management of gold reserves. It should be noted

that the 15 signatories of the agreement now hold approximately 15,300 tonnes

of gold or 47% of official holdings; the other two large holders being the United

States and the IMF.

As mentioned above, prior to the Agreement there had been some interest to

lend beyond one year – but by no means a trend. However, in the last couple of

years we have seen a remarkable transformation with trades up to 3 years or

even longer becoming more common. The process has been two-fold. Firstly the

poor returns on short-term gold deposits have led the official sector to look for

higher yield – and a move along the curve has been the simplest way to achieve

this. Secondly, this trend to the longer maturities has been very much led by the

European central banks. Since the fate of their gold holdings are effectively

determined until the expiry in September 2004 of the Agreement there are few

issues about maintaining short-dated liquidity in case of a sale and therefore

©2

00

1

Ba

nk

for

Int

ern

ati

on

al

Distribution of global gold holdings


65

little hesitation about locking up gold balances for longer periods. Credit issues

have been largely negated by the growing use of collateral agreements.

Some 80 out of 190 central banks globally are now providing the liquidity needed

by the market. It is believed that ten to fifteen central banks are active in the

derivatives markets, this number has been bigger, but declined in the past years.

But let me get back to my initial point.

Central banks now make a distinction between liquidity portfolio and their in-

vestment portfolio. Over the years, central banks’ portfolio managers have

reached a level of sophistication that is often comparable to that of their peers

in the private sector. A rise in reserves often allows central banks to extend, for

at least a part of their currency reserves, the duration and, as a result, to in-

crease the return on their investments. However, despite these revolutions, one

aspect has not changed and that is liquidity.

While central banks are now increasingly prepared to extend the duration of

their investment portfolio, often as far out as ten years or even longer, they

remain nevertheless limited in investing in very liquid instruments, such as Gov-

ernment papers, Agencies or BIS securities.

This brings me back to my initial remark that gold needs to be treated as an

Asset Class on its own. How liquid are gold placements and how could central

banks become more active in gold reserve management?. The ability to effi-

ciently mobilise any reserves without undue market impact is an essential

condition for sound reserve management. A liquid market environment is also

essential for portfolio managers to be able to take advantage of any ex-

pected interest rate fluctuations. In my opinion, gold should not be treated

in the same way as currency reserves as long as it does not offer adequate

liquidity.

Having said this, it is not my intention to suggest that central banks should not

place part of their gold on deposit. A clear distinction should be made between

central banks having large reserves, both in currency and gold, and these central

banks with relatively small currency and gold reserves. Large official gold hold-

ers could probably afford to place part of their gold on deposit, even for longer

periods, as they may have no imminent need for their gold and therefore be less

concerned about the liquidity aspect. On the contrary, smaller and less reserve

rich holders may need to consider very carefully the issue of liquidity as they

may need to mobilise their gold at short notice.

The 1999 Central Bank Gold Agreement

Let me now turn to my second item, the future of the Central Bank Gold Agreement.

Since September 1999, I have been asked on several occasions if and when the

Agreement will be extended. The answer is – I do not know. I can only repeat

what has been said in the original statement. The Agreement will be reviewed

66

after 5 years. I personally believe that the Agreement will, in one form or an-other, be extended. As I mentioned on previous occasions the signatories mayconsider various scenarios when they discuss the future of the Agreement. Iwould envisage the following three possibilities:

- the Agreement is not extended,- it is extended in exactly the same form as at present,- or it is extended but in a modified version.

©2

001

B a

nkfor

Int

ernati

on

alS t

Gold after 2004

Possible scenarios before or at the expiry of theCBGA

• CBGA is not extended

• CBGA is extended in its present form

• CBGA is extended but in a modified version


If the Agreement were not extended in any form, the market would certainlyfind that disappointing. Should the Agreement be extended in its present form,it would be positive – as long as both supply and demand for gold has not changedsubstantially in the meantime. I believe that the most likely scenario is that theAgreement is extended in some modified version.

This could have both positive and negative implications for the market. On thepositive side: a reduction in the amount of gold to be sold would provide somelonger-term support for the gold price. An increase in the number of signatoriesmight also be considered in a positive manner.

©2

001

B a

nkfor

Int

ernati

on

alS t

The 1999 European Central Bank Gold

Agreement

The European Central Bank and the central banks of Austria, Belgium, Finland,France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain,Sweden, Switzerland and England announced that:

• Gold will remain an important element of global monetary reserves

• The signatories will not enter the market as sellers, with the exception of alreadydecided sales

• The gold sales already decided will be achieved through a concertedprogramme ofsales over the next five years. Annual sales will not exceed approximately 400 tonsand total sales over this period will not exceed 2,000 tons

• The signatories of this agreement have agreed not to expand their gold leasingsand their use of gold futures and options over the period

• This agreement will be reviewed after five years

Bank for international settlements

67

©2

00

1

Ba

nk

for

Int

ern

ati

on

al

BIS and Gold

• Security - A claim on the BIS is seen as comparablea top-rated insutrial country

• Liquidity - The BIS maintains a highly liquidenabling it to mobilise large amounts within

• Confidentiality - Central banks are able to operatediscreetly through the BIS when they do not wishactivities to be read - or misread - by the


A reduction in the lending activity of the signatories would also tend to support

the price, but as I realise that the market would not appreciate such a reduc-

tion, I would exclude such a possibility.

Among the possible negative outcomes: Should one of the existing signatories

drop out, that could be damaging. Any increase in the size of sales or lending

activity would be seen as negative unless it had been prompted by a lasting

sharp increase in demand or by a substantial reduction in supply.

The BIS and Gold

Finally, let me spend a few minutes on the BIS and on its involvement in gold.

The BIS is the oldest but at the same time least well known of the international

institutions. It is owned by some 50 central banks, including the central banks of

all the major industrial countries and a number of emerging market countries as

well. As the focal point for central bank meetings, negotiations and co-ordina-

tion, some of the mystery that has in the past surrounded central banking has

also surrounded the BIS.

The BIS is best described as the central bankers’ bank. Of course, unlike its

members and customers, the central banks themselves, the BIS does not have

the power to create money. Instead the BIS provides a forum for central bank

meetings, co-operation and co-ordination. It also provides commercial banking

services to the central banks. In particular, the BIS takes foreign exchange re-

serves from the central banks and places them back into the market. This classic

financial intermediation role originated with the founding of the BIS in 1930. At

that time, the BIS was established to manage and re-invest in Germany the post-

World War I reparation claims of the victorious powers. These functions soon faded

into insignificance when reparation payments ended with the Great Depression

and the coming to power of the Nazi Government in Germany. But by that time,

the BIS role as a financial intermediary between the central banks and the market

had been established. The BIS has continued to play this role ever since.

68

Why have the central banks over the past 71 years continued to place funds with

the BIS in ever-increasing volumes reaching over $150 billion at the latest count?

The main reasons are the following:

Security - A claim on the BIS is seen as comparable to a claim on a top-rated

industrial country government, given our capital strength and the backing of our

central bank ownership.

Liquidity - The BIS maintains a highly liquid book enabling it to mobilise several

billions within hours.

Confidentiality - Central banks are able to operate discreetly through the BIS

when they do not wish their activities to be read - or misread - by the markets.

But let me now turn to gold. Gold plays two roles in the BIS balance sheet. First,

a symbolic role in that we continue to denominate our own accounts in Gold

Francs. When the BIS started in 1930, it adopted the Swiss Gold Franc - Switzer-

land’s currency at that time. A few years later Switzerland, following most other

currencies, broke its link with gold, but the BIS did not, continuing to denomi-

nate its accounts in Gold Francs. Today we still maintain this practice. We present

our accounts in Gold Francs - a unit defined as 0.29032258… grammes of gold.

This is mostly symbolic. Since we fix the price of gold at $208 an ounce, one Gold

Franc is fixed at $1.94, so our balance sheet is in reality denominated in US dollars.

Secondly, and more importantly, gold plays a real role in our asset holdings. We

own 192 tonnes, which we value in our balance sheet at $208 an ounce or approx.

$1.3 billion.

In addition, we hold a much larger amount of gold for our central bank customers.

This can be seen from the balance in our latest annual report.

In addition to owning gold for its own account as part of its overall investment

strategy, the BIS also provides a wide range of gold services to its customer central

banks. These services include financial intermediation, buying and selling of gold

for spot and forward delivery, providing technical advice on hedging, and arrang-

ing location swaps to facilitate central bank management of physical gold.

I am not giving away any secrets by saying that we have over the past years

carried out substantial buying and selling programmes for various central bank

customers. The aspect of confidentiality mentioned before has certainly played

an important role in selecting the BIS to carry out such transactions. The BIS has

attached the highest importance in executing such transactions in the best in-

terest of the customer without causing any negative impact to the market. So

far we have been successful.

69

External reserves in the IMF’s quota formulae

Michael Kuhn

Deputy Treasurer

International Monetary Fund

It is a pleasure to be here today at the annual World Gold Council Conference. I

am particularly pleased to participate in this distinguished panel on the interna-

tional monetary system, a topic that has been at the core of the IMF’s work since

its Articles of Agreement were negotiated over 50 years ago at Bretton Woods.

The international financial system has changed nearly beyond recognition dur-

ing the past decades, especially after the collapse of the postwar system based

on fixed exchange rates and a direct link to gold. But the basic multilateral

framework created at Bretton Woods has lost none of its relevance, with the IMF

as the central cooperative forum for managing international interdependence in

a way that takes account of the interests of all countries, large and small.

My remarks will focus on the IMF as a cooperative institution and, in a look

behind the scenes, on the current debate whether the financial and governing

structure of the IMF remains fully representative in today’s world. This debate

has centred on the role and relative size of IMF quotas. At the conclusion, and in

response to the questions of many of you, I will briefly touch upon the current,

and much diminished, role of gold in the IMF.

The IMF today

The IMF is probably best known to you as the financial institution that helps

countries in balance of payments difficulties, put together policy programs, and

financial rescue packages. This role of crisis manager and lead agent in support-

ing countries that are in economic and financial trouble remains critically im-

portant for the stability of the global financial system.

However, the IMF is more than a lender and financial crisis manager. Equally

important, if not of greater significance, is the Fund’s role in promoting good

policies—sound money, prudent fiscal policy, strong financial sectors, and open

markets—and thus helping to prevent crises before they happen. Crisis preven-

tion has become a much more important aspect of international cooperation,

and recent developments demonstrated the need for strengthened bilateral and

multilateral surveillance—the key responsibility of the IMF.

Among the many recent IMF initiatives for reform of the international financial

system, the decision to become much more open and transparent stands out as

nearly revolutionary for an institution that used to be very secretive. Indeed,

70

without this move to greater openness, my remarks here today would not have

been possible. Some years ago, the Fund published only a few background pa-

pers. On surveillance, the only publicly available information was a very brief

summary in the Fund’s Annual Report, and details of Fund programs were consid-

ered highly confidential. Today, the Fund publishes a wealth of information about

its policy advice, lending arrangements, policies and assessments on key topics,

as well as all its financial activities. This information, including the papers and

summaries of discussions in the IMF Executive Board referred to later, is all

available on the IMF website.

However, one important aspect of the IMF, its financial and governing structure,

has remained essentially unchanged since its inception. This has raised ques-

tions whether the Fund’s internal structure and decision-making process are still

adequate for a truly global institution, which has grown from the original 29

members to 183 members at a time that tests its cooperative spirit with difficult

and wide-ranging decisions. Concerns about the internal structure of the Fund

have centred on the distribution of quotas in the IMF.

The role of IMF quotas

Quotas play a central role in the IMF. Each member country has a quota, which

serves several financial and organizational functions: the provision of financing

to the Fund, access to loans from the Fund, and voting power in the Fund. Most

important for the Fund as a financial institution, members have to pay their

quotas in full, with one quarter typically paid in usable foreign exchange and the

remainder in domestic currency. Prior to the breakdown of the Bretton Woods

system, the foreign exchange portion was paid in gold, and these payments in

gold were the main source for the Fund’s gold holdings.

Quotas are broadly determined by members’ relative economic positions.

The distribution of quotas is therefore heavily weighted towards the advanced

industrial countries. Together, these countries account for some 62 percent

of Fund quotas and thus of the voting power in the Fund. The United States

holds over 17 percent of the quotas and votes, followed by Japan and Ger-

many with slightly over 6 percent each, and France and the United Kingdom

with 5 percent each. The European Union countries together hold some 30

percent.

Quota shares in the IMF have not changed much in recent years. This has given

rise to concerns that the current distribution of quotas gives a disproportionate

weight to the economic powers of the past at the expense of countries that have

experienced recent rapid economic growth. The distribution is seen by many as

no longer representative of the current economic system in which the Asian

countries in particular, and emerging markets more generally, play a significant

role. Indeed, anomalies have emerged as some countries have grown relatively

rapidly and are able, willing, even anxious, to assume greater responsibility in

an increased role in the global financial system.

71

Quota formulas

The central role of quotas has led to considerable interest in and debate about

how quotas are determined. To guide the process of quota determination, the

Fund has developed quantitative criteria, or formulas, to “calculate quotas”.

These formulas have been refined, revised, and expanded to take account of the

growing number of countries that have joined the Fund over the past decades.

Today, there are four variables designed to take account of the principal finan-

cial functions of quotas. These are combined in a variety of ways to reflect the

economic structures of particular groups of members. The variables include (i)

GDP as the broadest measure of capacity to provide resources; (ii) openness, as

reflected in current account flows, to measure integration in the world economy;

(iii) vulnerability to external shocks based on the variability of current receipts;

and (iv) reserves, including gold valued at the historic price of SDR 35 per fine

troy ounce (about US $45 at current exchange rates). The formulas were last

updated some 20 years ago.

As a first step in addressing the concerns that quotas no longer reflect members’

relative economic positions, the Fund embarked on a revision of the quota for-

mulas. A panel of outside experts was commissioned in 1999 to provide an inde-

pendent view on possible reforms. The report of the experts emphasized the

need for greater simplicity and inclusion of a variable that would take account

of the growing role of international capital flows. Specifically, the experts rec-

ommended a major simplification involving a single formula with just two vari-

ables, GDP and variability of current receipts and long-term capital flows.

When the IMF’s Executive Board considered the experts’ report last year, broad

agreement emerged on the need for simplification and updating of the formu-

las. However, concern was expressed that the formula recommended by the

experts, once quantified, showed an increase in the concentration of quotas in

the largest members, which ran counter to the objective of a more balanced

distribution. This outcome is perhaps not surprising, given the predominant share

of the largest countries in world GDP.

Building on the work of the experts, the Fund staff analysed various economic

criteria and alternative formulas in a recent paper, which was discussed by the

Executive Board last month. A broad consensus is now emerging that the tradi-

tional economic variables should continue to be used but modernized to take

account of the growing role of international capital flows.

One open issue is whether foreign reserves remain a useful measure of capacity

to provide financing to the IMF, especially for countries with access to interna-

tional capital markets. In this context, the question whether gold holdings should

be valued at market prices rather than historic cost will also need to be ad-

dressed. While a number of countries use market prices, the IMF Articles of

Agreement prohibit the Fund from taking measures that could result in an offi-

72

cial price for gold. Use of market prices could also artificially inflate some coun-

tries reserves since it is unlikely that current prices could be realized in the

event of large market sales.

The debate on quota formulas is continuing. Clearly, formulas can only be fully

specified once the distribution of overall quotas, at least among broad country

groups, has been decided. And this is essentially a political decision. But it is

highly unlikely that any formula with economically meaningful variables would

result in a significant reduction of the calculated quota shares of the advanced

economies, given that these countries continue to be the largest participants in

the global economy.

Changes in actual quotas

Agreement on revised quota formulas is a necessary condition for adjusting ac-

tual quota shares. But it is not sufficient. In particular, it would be difficult to

adjust actual quota shares in the absence of an overall increase in quotas. This

is due to the fact that no member can be required to accept a reduction in the

size of its quota. Since all shares must, by definition, add up to 100 percent

before and after a quota alignment, an increase in the shares of some must be

offset by an equivalent reduction in the shares of others. As countries that would

experience a decline in their quota share cannot be forced to accept a decline in

the size of their quota, the only way to effect the decline in quota share is to

increase the size of the quota of other countries, and thus increase the size of

Fund quotas as a whole.

General quota increases normally take place as the result of the five-yearly

general reviews of IMF quotas. Since its inception, the Fund has conducted eleven

general quota reviews, and quota increases were agreed in nine of these re-

views, including the last review, which was completed in early 1998. The next

general review of quotas is scheduled to commence in January of next year. In

the absence of a general increase, an alternative, and much more limited, ap-

proach could be considered in which a very few countries are given selective

increases in their quotas.

Any changes in quota shares, if and when they are agreed, are not likely to alter

the IMF quickly or dramatically. Nor would a large change be desirable. For the

IMF as a financial institution, the provision of financing remains of paramount

importance, and the major industrial countries will remain the largest members

and principal creditors of the Fund, given their weight in the world economy.

In terms of access to Fund resources, quotas have become less important as

the Fund’s policy has become more flexible over the years. Under the original

Articles of Agreement, the maximum amount of a loan was set at 100 percent

of a member’s quota, in order to balance the obligation to provide resources

with the right to obtain financing. Under current policies, a member may bor-

row up to 100 percent of quota annually, provided outstanding loans do not

73

exceed 300 percent of quotas. These limits can be and are exceeded in excep-

tional circumstances.

In light of members’ evolving balance of payments needs, the Fund has also

introduced special policies for situations requiring very large commitments which

have no stated limits, but shorter maturities and higher interest charges to en-

courage early repayment. Since the Mexican financial crisis in 1994/95, and

particularly following the Asian crisis in 1997, the size of IMF loans has increased

significantly reflecting the much larger financing needs that emerged. At present,

the bulk of financing is provided under programs involving exceptional access to

IMF resources.

Finally, while quotas also serve as determinants of voting power, the IMF has a

long tradition of making decisions by consensus rather than by counting votes. In

this tradition of consensus, and with 12 of the 24 seats on the Executive Board,

the developing and transition countries have had notable success in ensuring

that their interests are recognized and their concerns addressed.

Gold in the IMF

Responding to the questions many of you have posed, I would like to conclude

with a few comments about the current role of gold in the IMF. The slightly over

100 million fine ounces of gold owned by the IMF make it the third largest offi-

cial holder of gold, after the United States and Germany. While the role of gold

in the IMF has diminished greatly over the years, the Fund has a continuing

interest in gold market developments.

Gold occupied a central role in the postwar international monetary system and,

therefore, in the IMF as the institution intended to oversee the operation of that

system. The collapse of that system in the 1970s led to a fundamental change in

the role of gold in the IMF. The change was incorporated in the Second Amend-

ment of the IMF Articles of Agreement, which became effective in 1978. Today,

the role of gold in the IMF is largely as a safety net. Gold remains a valued asset

but is not used in the Fund’s regular activities.

The IMF no longer has the authority to buy gold and may only accept gold in

payments from members on the basis of a specific decision requiring an 85 per-

cent majority vote. The IMF may decide to sell gold at market prices or to “res-

titute” gold (i.e., sell gold at the old official price to countries that were mem-

bers in 1975) by the same high majority vote. Finally, the IMF may not engage in

many of the standard transaction that occur in the modern gold market, includ-

ing loans, leases, swaps or gold collateral for loans, and must avoid managing

the gold price or establishing a fixed price in the market.

The IMF has adopted broad principles governing its gold policies. These princi-

ples acknowledge that gold provides fundamental strength, operational flexibil-

ity, and additional credibility to the Fund’s precautionary balances. Therefore,

74

any gold mobilization should avoid weakening the Fund’s overall financial posi-

tion. They also recognize that retention of relatively large gold holdings would

enable the Fund to meet unforeseen contingencies, and that the Fund has a

systemic responsibility as a large gold holder to ensure that any gold mobiliza-

tion avoids causing market disruption that could have adverse effects on gold

holders, producers or the market. Finally, any sale of gold should not weaken,

and preferably should strengthen the Fund’s financial position, by retaining any

capital profits and utilizing only the income derived from the investment of

those profits.

Consistent with these principles, the IMF undertook off-market transactions in-

volving 12.9 million ounces of gold in 1999/2000 to help finance Fund participa-

tion in the international effort to reduce the debts of the heavily indebted poor

countries (HIPC). The initial proposal was to sell the gold in the market and use

the income from the investment of the profits to provide grants to eligible poor

countries which would be used to repay IMF loans. However, concerns expressed

by gold producers and others about the possible market effects led to a change

in approach, even though the amount of gold to be sold was modest. In the

event, the gold was sold to Mexico and Brazil in an off-market transaction at

market prices and the same amount of gold was accepted at the same price from

these countries in repayment of IMF loans. The profits from the sales have been

invested and the income is being provided to a special Trust Fund and will be

disbursed to HIPC participants as needed.

The IMF’s effort to be responsive and responsible involved substantial cost to the

institution in terms of liquidity and income at a time when other official holders

were supplying much larger amounts of gold to the market. Moreover, the Fund

transactions were fully publicized in sharp contrast to the lack of transparency

that occurs in other cases of gold sales by official holders. This demonstrates the

Fund intends to be a constructive market participant and that any future mobi-

lization of gold would be undertaken in a manner to avoid market disruption.

75

Questions:

The role of gold in the international monetary system

Chair: First question, back there.

Questioner (John Crow): Bob, you made a fairly categorical statement that the

euro couldn’t stand going below 85 cents because of inflation. If Europe is enter-

ing into recession, could you explain why you are so categorical? Let me also

note that the pass through from exchange rate change into inflation seems to

have diminished substantially in recent years, including in Canada, by the way.

Professor Mundell: Well, precise limits on exchange rates are arbitrary but when

the euro went down below 85 and hit an all time low of 82, it began to have the

immediate effect of raising the prices of international goods and starting up,

down the line, wage increases and therefore the basis of core inflation. I know

that the European Central Bank has a mandate to target inflation and not ex-

change rates. However, depreciation is one of the best forecasts of future infla-

tion, and if a central bank ignores these signals it is making a big mistake. A few

months down the line, exchange rate changes always affect future inflation.

Now about the passthrough effects. It is not so much a question of them having

declined. It is rather that the time period in which they are effected differ

between economies partly because of the degree of openness and partly be-

cause of the direction of trade. Countries like Ireland and Spain, on the periph-

ery of the continent, experience more immediate passthrough effects from the

euro’s depreciation than countries in the core, like France and Germany. Further

depreciation of the euro would be experienced first in those countries but the

other countries will not in the final analysis escape.

Chair: Can I just add a comment there? John said that he thought there was

Canadian evidence that the pass through from exchange rate depreciation to

inflation was less than it used to be. But my comment on the other side would be

that the Monetary Policy Committee of the UK has made it quite clear in its

pronouncements in recent months that it does think that there’s a pass through,

and it’s concerned about the possible decline in sterling, perhaps to align itself

with the euro before the UK joins, and it takes that into account very much in its

monetary policy decisions. Sorry for that personal observation.

Professor Mundell: Let me elaborate on this. You have to distinguish between

different situations. Sometimes exchange rate changes have an effect upon in-

flation and sometimes they don’t. Consider the situation before and after the

1992 ERM crisis.

First consider the British situation. On the eve of Britain’s entry into EMU in

October 1990—the month of German unification—Britain had an inflation rate of

76

almost 10 per cent. It entered the ERM at a rate of 2.95 marks per pound. When

it left the ERM on “Black Wednesday”—September 16, 1992—the inflation rate

had been reduced to 4 per cent. This was a great demonstration of how a nomi-

nal anchor can be successful in reducing the inflation rate. But the excess of

Britain’s inflation over Germany’s led to and aggravated the overvaluation of

the pound. As a result, when Britain left that currency area, there was substan-

tial room for depreciation without much additional inflation.

There’s also the case of the Italians. In the spring of 1992 prices of real estate

near Rome and other cities doubled, clearly anticipating a devaluation. When

the Italians left the ERM in September 1992, the mark rose eventually from 800

lire to 1000 lire. Many people were astonished that the depreciation did not

cause much inflation. The fact was that the inflation had preceded the devalua-

tion when it was anticipated. The depreciation is the consequence of overvaluation

and therefore does not have a pass-through effect.

But it is a very different case if the exchange rate change occurs from a position

of equilibrium, as is frequently the case during the phenomenon of overshoot-

ing. In that case an overshooting that leads to undervaluation leads to an in-

crease in the prices first of traded goods, then wages and then domestic goods.

The depreciation is a cause of undervaluation and therefore provokes the conse-

quence of compensatory inflation.

Let me mention now the case of Canada, a country that pioneered flexible ex-

change rates and has given economics some rich examples. In 1987 the Bank of

Canada announced a policy goal of zero inflation at a time when the Canadian

dollar was something like US$0.73. This was a formidable task for several rea-

sons, not least because the American inflation rate was about 4 per cent and

financial markets were closely connected. Theoretically, to arrive at an equilib-

rium with a 0 inflation rate in Canada and 4 per cent inflation in the United States

would have required Canadian interest rates to be 4 percentage points below

American rates and Canadian wage rates, with equal productivity growth rates

would have to rise by 4 percentage points less than American wage rates. The

Bank of Canada never made this clear to the rest of the country and the experi-

ment, while fairly successful in getting the inflation rate lower, turned out to be

the biggest fiasco in Canadian economic history since the Great Depression!

To get the Canadian inflation rate down, the Bank of Canada increased interest

rates, which had the effect of appreciating the Canadian dollar, which soared to

over US$0.91 by 1990, killing export and real estate markets and driving unem-

ployment into two-digit levels. Later, the Canadian dollar came back down to 73

cents, near its purchasing-power-parity equivalent.

Recently the Canadian dollar has been falling against the American dollar, and it

has reached a low of 62 US cents. This recent process has not involved any

excess inflation in Canada and we have to look for a different explanation. In my

opinion, the explanation lies in differential productivity growth between the

77

United States and Canada. The former country has experienced the IT revolution

earlier and more strongly than has Canada, and it has resulted in higher produc-

tivity growth in the international industries. This means that the US real ex-

change rate has to appreciate against Canada’s and other countries. Had Canada

fixed its currency to the US dollar it would mean that the inflation rate in Canada

would have to be lower than that in the United States and perhaps even nega-

tive. This is my opinion also explains why countries with hard fixes to the US

dollar have actually experienced some deflation—examples include Hong Kong,

China, Argentina and some of the Gulf states.

I want to also make a comment about Mexico’s situation today. To a certain

extent Mexico is in a position of using an overvalued currency as an instrument

to reduce inflation, just as Britain and Canada did in different ways. Mexico uses

monetarism as a device for getting the inflation rate down after their long pe-

riod of over-depreciation of the peso. The dollar was 11 pesos and then the

Governor of the central bank started to use tight money to get the inflation rate

down. He was successful in doing so but in the process, brought the dollar down

to 9 pesos, overvaluing the peso. The end result was to bring the inflation rate

down to its current level of 6%, which seems to be a great apparent success for

the Fox government, and the plan is to bring it down to 4% in the next year. But

when it does get down to 4%, the peso is going to be overvalued and there is

going to be either a crisis or a quick movement down in the exchange rate.

Having accomplished that job, of achieving the disinflation, you’ll have to move

the exchange rate down to an equilibrium level again.

Chair: Thank you, that was, I have to say, personally quite illuminating.

Questioner: For Mr Kuhn. My name is Murray Pollack. You talked about IMF trans-

parency and you pointed out the IMF doesn’t lend or do anything with its gold;

it’s all one piece. Member countries of the IMF: any chance we’ll ever see some

transparency regarding what they do with their gold, how much is in the vault,

how much is on loan, how much is under swap? That would be an interesting

number. Does the IMF publish those numbers? Thank you.

Mr Kuhn: We do not publish the numbers directly on swaps or loans of gold by

our member countries. We do have a new template for reserves that includes all

potential activities on gold holdings. That is part of what we call the special

data dissemination standard – you can find more information on that on our

website. Most of the industrial countries adhere to this standard, which covers a

wide range of statistics, and therefore should in adhering to this standard, dis-

close the activities in gold.

Chair: Any more? Yes.

Questioner: Kamal McCoy from McQuarry Bank. Professor Mundell, a question

for you: you mentioned that a weaker euro has been a blessing for the European

economy. Given that the world awaits for signs of recovery from the US, do you

78

think a weaker US dollar is something that should be encouraged to spur that

recovery, or do you think that there are too many threats associated with that?

Professor Mundell: I think that the strong US dollar and the weak euro have

changed the ratio of the growth rate of the United States relative to the growth

rate of Europe. Europe has delayed the onslaught of recession because of the

cheap euro and the US recession came earlier, and maybe will go deeper, be-

cause of the strong dollar. And I do think that a change would partly reverse the

situation.

[Gap in recording, changing over tapes]

I do think it would be in US interests to keep the euro from declining below, say

85 US cents. It would be easy for the United States to maintain a floor at that

level and it couldn’t be seriously challenged. It might even be in US interests to

put the floor at, say, 90 cents. But I don’t think it would be in Europe’s interest

during this slowdown for the euro to be much about 90 cents.

It would be easy to imagine circumstances in which the United States wanted to

replay the Plaza Accord of 1985 all over again. There could develop protectionist

pressure in the United States that would not suit US general interests or its

commitments to WTO, and an attempt to get a weaker dollar might be looked

upon as an alternative. The large debt position and huge current account deficit

would help to support the US case for a lower dollar. At the present time the

United States has not made that case—the knee-jerk reaction of US Treasury

secretaries has been to say that a strong dollar is in US interests. But that may

change, and prolonged weakness of the euro as the global recession unfolds

might reignite a policy to achieve a lower dollar. For that reason alone it would

not be in the euro area’s interest to let the dollar drop below 85 cents.

Chair: I’d like to thank our speakers.

79

Gold in the 21st century


Ladies and Gentlemen, it wasn’t a very long time ago, but it feels that way now,

there were words coined by Alan Greenspan about “irrational exuberance” on

the stock exchange. Apart from any other contributions to coining new terms,

another observation from Alan Greenspan was that, over the last half century,

weighted in tonnes, the US economy hadn’t grown. These were the years when

we were speaking about the “weightless economy”, “virtual businesses”, the

“new economy”, and investors were expecting instant gratification on the stock

exchange. It seems like a long time ago already.

Gold was not really in the limelight during those years. Gold is one of the world’s

oldest economies and it’s certainly one of the world’s oldest global economies,

connecting peoples at remote corners of the globe at all times. This year, equi-

ties in the gold sector, in gold mining, have produced one of the best perform-

ance results that any investor could have found. I think we’re very fortunate

now that we’re coming to the concluding fourth session of today’s conference to

hear two people tell us about gold as investment and gold as it’s seen by some-

one who’s producing it. First by Rex McLennan, Chief Financial Officer of Placer

Dome, one of the world’s major multinational gold producers, and then followed

by Rob Weinberg, who will compare gold as an investment asset to others. So in

this way, once again, we see the same topic from two points of view; from the

point of view of the producer, and the point of view of the user. Rex.

80

Gold - an industry insider’s view

Rex McLennan

Chief Financial Officer

Placer Dome

Well thank you, Benedikt, for those very kind words of introduction. I’m really

delighted to be here in Berlin to be able to share the views of a senior gold

producer in what’s turning out to be some very turbulent and uncertain times.

With all the uncertainty following September 11, it’s prompted me to go back to

reading a book by a Canadian born economist, John Kenneth Galbraith, called

the “Age of Uncertainty”. It speaks to the 1970s, which was a period in which

the world’s leading economists had a very difficult time trying to understand

what was guiding the economy, and were even less able to prescribe cures. They

were forced to revisit assumptions about the economic paradigm of the time.

When I look back to those days, and John Kenneth Galbraith’s writings, it seems

to me that we may well be entering another such “age of uncertainty”.

So with that beginning, I’d like to start off with a brief overview of the topics

that I’ll be covering in the next 20 minutes. First of all, I’d like to tell you a little

bit about Placer Dome. I’ll talk about our strategy and the challenges we face in

running our business. It’s not a commercial for Placer Dome, as what I really

want to do is focus on producing industry issues but from our Placer Dome per-

spective. I’d also like to spend time to talk about how society benefits from gold

mining. And then I’ll wrap it up with a few observations on what would help to

improve the current state of our industry.

For those of you who may not be familiar with Placer Dome, we’re a Canadian

company focused primarily on gold mining, with additional interests in copper.

We’re the third largest gold miner in North America, and we’re the fifth largest

in the world. Our corporate headquarters are in Vancouver, Canada, but we’re a

global company and we have 14 mines in 6 countries on 5 continents. Our mines

are located in some of the most prolific mining districts on the globe and we

employ 12,000 people worldwide. We run our business in US dollar terms, and

our functional currency of reference is the US dollar. One of the attractions of

investing in Placer Dome stock is our sheer size and liquidity; we’re listed on 5

international stock exchanges, although the vast majority of our trading occurs

on the New York and Toronto exchange, where on any given day we have about 2

million shares trading hands, and it’s not unusual to see as many as 10 million

shares bought and sold during heavy trading days at razor thin margins; some-

times as little as 5 cents.

My view about this business is that as a single gold producer, our product isn’t

simply gold. And our customers are not simply the banks, the jewellery fabrica-

81

tors or others who buy gold. What we’re really selling is a portfolio of high

quality gold operations. Our principle customers, in this sense, are the compa-

ny’s shareholders. That doesn’t mean that we should not be concerned about

gold as a product and not help to promote it, but it’s important to know that our

basic strategy is to find, develop and run our mines as efficiently as we can and

more efficiently than anyone else in the industry in which we compete. So our

mission is to successfully compete against other gold mining companies for share-

holders, for capital and for mine development opportunities. What we do not

want to be is in the business of competing in the official sector to meet gold

demand, and I would say we simply don’t stand a chance of winning in that

game; after all, we don’t exactly have the same cost base.

For Placer Dome to be competitive, which means to attract capital and have the

best assets, it requires that we must have the best people on our team and that

we run the business to be profitable throughout price cycles. The key tools we

use to achieve this are as follows: first, a balanced hedge programme that offers

some protection from downside risk, while preserving the upside when the gold

price rises. I’d say that our programme is probably one of the most effective in

the business in achieving this desired balance. It has the highest per ounce value

and the highest mark to market value, right now of approximately 450 million

dollars. Secondly, we place a very strong emphasis on research and development

initiatives, and these allow us to continually find ways to be innovative and

more efficient in our business. As a result, we have one of the lowest cost struc-

tures in the industry and we generate about 400 million a year in cash flow from

operations, even at today’s prices. But I would say that we prefer to be building

mines, and not just building cash.

So let’s talk a little bit about price risk: by far the biggest challenge we face in

this business is managing price risk. In real terms, the gold price has declined for

nearly 20 years, and this has been due in part to the fact that the official sector

has been gradually privatising its holdings. But I think more broadly, it reflects

the evolution of modern day monetary policy and the globalisation of capital

markets, which are holding inflation in check and preserving or increasing the

value of major currencies relative to gold. And of course now it has having a

major impact on gold mining and new gold mining development. So our industry

is finally getting serious about balancing the desire for top lying growth; that is

growth in reserves and production, with bottom line expectations of operating

profitably at sub-300 gold prices. That’s vitally important at this juncture be-

cause the total capitalisation of our industry has declined to about 35 billion

dollars worldwide, and that’s a fraction of the size of the number of single

companies trading on the New York stock exchange today.

Throughout the 1990s, investors and producers were very focused on growing

reserves and production on the expectation that the gold price would remain

strong or rise further, and this would provide a decent profit margin. Unfortu-

nately, this is no longer the case. Today, miners have to demonstrate that we can

run a profitable business when prices are weak. So industry leaders have moved

82

from the pursuit of top lying growth in reserves and production, to the more

mundane task of actually making money consistently, in good times and in bad

times. And few are actually accomplishing this in these times.

For the past few years leading up to September 11, we watched gold trade in a

fairly tight band between 260 and 275 dollars an ounce. This was punctuated by

some very interesting but short lived rallies, such as the one that we witnessed

in the first few days and weeks after the September terrorist attacks. Tradition-

ally, investors look to gold and gold equities as a safe haven during periods of

political or economic unrest. But today gold has given up all of the gains it

posted in response to September 11, and it is again hovering around 275 dollars.

Most of the experts who predicted it would rise to the 300 dollar level in the

near to mid term are beginning to shake their heads, wondering why the rally

has been so unsustainable. But as producers, we have seen this type of volatility

before, and experience has taught us that we must run our business at today’s

spot price. So we’ll maintain our focus on the bottom line and we’ll stick to the

hard task of making money at 275.

While on the topic of price volatility, it’s important to recognise that it’s some-

thing our shareholders not only expect, but want. So while we use forward selling

as a means to limit the impact of price volatility on the downside, we also offer

gold investors exposure to high quality gold projects with good upside potential.

Volatility is not something we shy away from, we just have to ensure that we

deliver quality exposure to the gold price by investing only in the very best projects.

More so than ever before, the operative word today is becoming “quality”.

Like any extractive industry, we must go where the resources are. And the devel-

oped world is well explored and the most prolific gold deposits have already

been found and developed. The frontier is the developing world; it offers gold

miners the opportunity to build the world class mines of the future. At Placer

Dome, nearly 70% of our production is generated in Canada, the US and Aus-

tralia, with the remainder coming from lesser developed or emerging jurisdic-

tions. For example, two of our mines are located in Papua New Guinea. We first

invested there in the 1930s and we’ve operated successfully for more than 70

years. We also have a 50% stake in the South Deep project in South Africa, where

we’re investing our capital and applying our technology to develop a trackless

mechanised mine operation some 3000 metres below surface. Operating in these

challenging jurisdictions is something that we at Placer Dome have become par-

ticularly adept at, and we’re very proud of our track record.

I’d like now to talk about earning the cost of capital. Another challenge we face

in this business is earning our cost of capital, and while that sounds very simple,

the gold price environment has put pressure on industry to demonstrate that we

can in fact do this. Simply put, gold miners have to make money consistently

over the long run to attract capital. Not just from traditional gold investors but

from the much larger base of generalist investors. As in other sectors, when an

industry fails to earn its cost of capital, the outcome is very predictable: we lose

83

investors and with that we lose the opportunity to create value from our mine

development opportunities. Well, the gold price responds to basic supply and

demand fundamentals like other commodities; its allure is that is a rare, highly

liquid financial asset. It doesn’t represent a liability to any government so it is in

a sense the ultimate currency of last resort. Gold producers provide leverage to

gold exposure. So the role that gold stocks play in portfolio diversification has

enabled gold producers to access equity capital at a lower cost than other com-

modity sectors such as base metals or oil and gas. The flip side of this is that

senior gold stocks have tended to trade at much higher multiples of cash flow

per share and higher multiples of net asset value per share than other resource

sectors. So in other words, the capital market has expected, and tolerated to

some extent, a lower return on gold equities. But as this slide shows; the major-

ity of gold equity returns have in fact been under water over the past 5 years.

The argument can be made that this under performance reflects the cost of

insurance protection that gold equities provide to investors. However, this only

goes so far, and my personal view is that what is fine in theory, may ultimately

fail in practise.

Gold as an asset class has had a hard time competing against the high real

returns offered in the US capital markets throughout the latter 1990s. It’s only

been very recently that gold’s returns have in fact become very competitive.

Central banks have done such a good job these past two decades of instilling

confidence in major currencies, particularly the US dollar, and in controlling

inflation that the demand for this kind of portfolio insurance has suffered. How-

ever, the fundamental role for gold and gold equities remains and there’s now

clear evidence of increasing investment demand for gold.

Relative to the broader markets, gold equity performance has actually been very

good this past year. I would say this is more a result of the disastrous performance

of other sectors, notably the technologies, rather than actual earnings or financial

performance from the gold sector. In fact the majority of mining and minerals

companies have not even earned their cost of capital over the past decade. And

until quite recently, investor returns in the gold sector have been negative. We

should ask the question, “Why is that?” Well, it has to do with the replacement

cost of gold. For our industry to succeed in developing new mines around the

world, we need to demonstrate that we can earn more than our cost of capital.

And simply put, based on the current industry cost curve, we need higher than 300

dollar gold to consistently deliver a return in excess of our cost of capital.

Assumptions from a sampling of industry sources suggest that an average quality

gold deposit requires something like 40 dollars an ounce to find it, about 80 dol-

lars per ounce of capital to build a project and 180 dollars per ounce to mine and

process the ore. And, in fact, I believe the recent Gold Fields Mineral Services

report has the average cash cost of producing gold at something like 191 or 192

dollars an ounce. Anyway, one assumes another 25 dollars per ounce to cover

reclamation and overhead costs and to provide a margin of return to investors;

this brings the gold price required up to about 325 dollars per ounce.

84

At Placer Dome, we’ve had the good fortune of owning a portfolio of gold assets

that have a number of very high powered, low cost mines. And we also have the

benefit of a significant hedge position, which enables us to generate strong cash

flow, at least for the time being. However, as I mentioned earlier, we’d prefer to

be building quality gold mines rather than building cash. For that to change, we

will need a combination of higher gold prices, lower exploration finding costs

and productivity improvements. So what lies ahead? In the absence of a higher

gold price, the obvious conclusion is that the gold mining business is going to

change from what it is today. Our industry is highly fragmented and it lacks the

strong economic incentives to drive us towards major consolidation. The success

of individual companies will be determined primarily by the strength of their

existing assets and the ability to successfully find or acquire new reserves at

prices low enough to earn more than their cost of capital.

Regardless, the supply of gold from below the ground seems destined to stabilise

and perhaps decline gradually from the current level of just over 25 hundred

tonnes per year. It would appear that fabrication demand will become more

reliant on supplies from existing stocks rather than from new primary mine sup-

ply. Of the world’s existing gold stocks, the single most important holder, the

official sector in the developed world, continues to sell but more importantly is

perceived to be a seller in future. And while perception and reality often differ,

in the case of the gold price, at least the impact on the gold price, perception is

the reality. This forces the producing industry to adopt a very cautious long term

price view in their decision making, leading in turn to fewer projects. I expect

there will also be more consolidation in the industry as high cost producers close

down or are taken over by companies that have the technical ability to lower

costs. I believe this will lead to the concentration of the quality gold assets in a

small menu of tier one gold producers. We are seeing more evidence of this in

announcements made earlier this week.

However, Placer Dome is not going to be drawn into the game of pursuing growth

of production and reserves when it is not accompanied by growth in cash flow

and earnings per share. We will only pursue those opportunities that are accre-

tive to our existing shareholders. High quality gold assets are very scarce. At

today’s prices few deposits can be brought economically into production. Explo-

ration budgets have been slashed and new projects are being put on hold or

abandoned altogether. Many operating mines are having trouble eking out mod-

est profits, and some are being closed ahead of schedule as capital projects are

cancelled. Because of this, nearly 10 billion dollars of new projects have been

postponed or cancelled over the past two years due to lowered price expecta-

tions of producers. Some key examples are on this table and they include Las

Castinas in Venezuela, Pascuelama on the Chile/Argentinian border, Serra Cuesidas

in Costa Rica and the Phoenix Project in Nevada. We’ve now concluded that

further development of our own getchl property in Nevada would require a gold

price well in excess of 300 dollars per ounce.

So if the outlook for gold is so fraught with peril, why continue to mine it at all?

We do so because we recognise that there’s an ongoing need in the world for

85

mining in metals, and because of the positive contributions that mining makes

to host countries. Mining activity creates jobs, it generates taxes, it generates

wealth, it stimulates economies and it creates infrastructure. It’s a vital indus-

try in many developing nations. Foreign investment and the development of

natural resources have the potential to make sustainable improvements in peo-

ple’s lives. In that sense, the loss of mine development opportunities in develop-

ing countries, such of those I spoke of earlier, also represents a cost to the

developed nations, who in the end, in one form or another, provide their safety

nets.

At the global level, mining companies have a role to play in social responsibility.

Around the world, the quest for metals has fuelled community development,

often in very remote areas. We’ve built schools and hospitals, we’ve brought

electricity, education and health care to areas where the local governments did

not have the capacity or the resources to do so. Perhaps more importantly, from

a global perspective, mining helps redistribute wealth between the haves and

the have-nots. Historically, the developed world has controlled the lion’s share

of resources. As I heard last January, at the World Economic Forum in Davos,

we’re not getting any closer to a more equitable distribution of wealth. The gap,

in fact, threatens to get wider as we see the effects of what has been termed as

the “digital divide”.

Developing nations lack the infrastructure or even the tools that will allow their

citizens to participate in the knowledge economy. Furthermore, they are unable

to tap into the full intellectual capacity of their people to the extent that we

can in the developed world. To me, this is the fundamental reason why mining is

such an essential activity: it’s to make people’s lives better. We need metals, and

so far as governments are concerned about rebalancing wealth around the world,

the business of mining should be taken very seriously. Particularly in developing

countries which rely primarily upon resource extractive industries to develop an

industrial base and to foster social progress. Natural resources, including gold, are

only of value to your community if they are extracted at a profit.

At the outset, I mentioned that before I sat down, I’d share my thoughts on some

changes that would help to sustain our industry. Gold miners are in the unfortu-

nate position of being price takers, yet they are exposed to very long lead times

before recovering their capital investments. We can only go so far in lowering

production costs, as I mentioned earlier. The official sector influences the gold

price, not just by their selling and lending activities, but more importantly through

perceptions left as to their future intentions and attitudes towards gold. Thus,

self imposed restraints on official sector gold sales, which might be triggered

when the price dips below a predetermined level (and that might be the replace-

ment cost of gold), would help to sustain and promote investment in gold mining.

Further, the future of the European Central Bank’s agreement on gold weighs

very heavily on our minds. The agreement removes much of the perceived threat

of large scale European Bank sales, and supports gold’s continued role as a store

of value. It’s now near the halfway point. We hope it will be followed by a

86

similar agreement and better yet, a moratorium on gold sales until the price

rises to its full replacement cost on a sustained basis. Finally, I believe it is vital

that more producers support the World Gold Council’s marketing initiators. As

the gold mining industry’s leading trade association, the World Gold Council is

ideally suited to promote gold both as a luxury item in the eyes of consumers

and for investment purposes. Although our industry is fragmented, we’re finally

coming together in a united way to create new demand for gold. We need to

demonstrate success on this front, and I can assure you that Placer Dome will be

there to do its part in this endeavour. Thank you for your time and attention.

Chair: Thank you very much, Rex.

87

Alternative investments compared

Potential Liquidity Diversifier Risk Income Holding

returns costs

Private Equity

– seed capital v.high low high v.high low high

- buy ins/outs high low medium high medium high

Hedge funds various low high various various high

Gold low* high v.high low low low

Commodities volatile high high high low low

Timber medium low high medium medium high

Collectibles medium v.low high high low medium

Source: Phillips & Drew

* except in times of economic unrest

Why everybody should own gold

Robert Weinberg

Head, Institutional Investment

World Gold Council

Good afternoon, Ladies and Gentlemen. I see that in the programme, the title of

my presentation is given as “Why Everybody Should Own Gold”. Now, of course,

that is a sentiment with which I wholeheartedly agree. But I’m sorry, I shall

disappoint you. Today, I shall be focusing on a much smaller area, and that is the

area of professional investment. Just very briefly: What is a professional inves-

tor? – it is somebody who views the assets that he owns from a portfolio per-

spective. So that would include pension funds, insurance companies, ultra high

net worth individuals, and so on.

We’ve heard a great deal today about uncertainty so it cannot have escaped

anybody that there is growing uncertainty about the future of mainstream asset

classes. That is why alternative investments are such a hot topic at investment

conferences. All sorts of alternative assets are being promoted as portfolio

diversifiers and here you can see some of them. But buying diversifiers such as

these is one thing, but selling them when one needs the cash is quite another.

Gold’s liquidity is, of course, one of its critical investment attributes, and cer-

tainly in this particular space.

Here you can see the ratio of market capitalisation to GDP of three major mar-

kets. Japan had an enormous asset bubble in the late 1980s; it’s still recovering.

Now the rest of the world is going through its own deflation of what has been

88

Market cap to GDP ratio

(Ratio of market capitalisation to GDP, per cent)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

Q2

73

Q2

74

Q2

75

Q2

76

Q2

77

Q2

78

Q2

79

Q2

80

Q2

81

Q2

82

Q2

83

Q2

84

Q2

85

Q2

86

Q2

87

Q2

88

Q2

89

Q2

90

Q2

91

Q2

92

Q2

93

Q2

94

Q2

95

Q2

96

Q2

97

Q2

98

Q2

99

Q2

00

Q2

01

Global US Europe Japan

So much for forecasts

DECLINE IN CONSENSUS FORECASTS FOR 2001(GDP growth, per cent)

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

USA Eurozone Japan UK

August September OctoberNovember December JanuaryFebruary March AprilMay June July

described as the biggest stock market bubble ever. Who knows where it will all

end and how long it will take.

The answer is unlikely to come from a consensus of even the most prominent

financial and economic forecasters. Here are consensus forecasts for GDP growth

in the year 2001. You can see there’s the US, there’s Europe, there’s Japan and

there’s the UK. The first forecast on the left hand side is August last year, and

89

Gold - an effective diversifier

45

41

55

5

1

-13

100

-20 0 20 40 60 80 100 120

REITS

Long Term Bonds

Emerging Mkts Equity

Intl Bonds

T-Bills

Gold

US Stocks

Correlation with Equities x100 (1990 - 2000)

Jan 1991 to Dec 2000Jan 1991 to Dec 2000

The essence of portfolio diversification

Return

Risk

Same return, lower risk

Higher return, same risk

here you go, month by month. So, it seems to me, that what these people do issimply follow existing trends. I mean, wouldn’t it have been nice, in August lastyear, to have been told “Mind yourselves, guys; growth is only going to turn outat 1%. Whoops! Even that’s wrong!” Rather than to be told it was going to be3.5%, and set our portfolios accordingly. Martin Wolf, who is Chief EconomicsWriter at the Financial Times, said just the other day that we may be facingpossibly the most serious recession for 50 years. Being ever the optimist, I verymuch hope that he’s wrong, no doubt we all do. But we shouldn’t ignore thesekinds of possibilities.

Investors strive to reduce the volatility, that is to say, risk profile of their portfo-lios but to do so without diminishing their expected returns. The alternative isthat they try to enhance returns without increasing risk and in order to do that

90

Five year Monte Carlo simulation

w ith quarterly rebalancing

Designed for

stress

environment

Wrong

Environment

Non-stress

Designed for non-

stress

environment

Wrong

Environment

Stress

Base CaseNon stress

environment

Stress

environment

0

2

4

6

8

1 0

1 2

1 4

1 6

1 8

0 1 2 3 4 5 6 7 8 9 1 0 11 1 2 1 3 1 4 1 5 16 17 18 19 2 0 21 22 23 2 4 2 5 2 6

Annualized Standard Deviation %

Annualized R

eturn

%

Gold - reduces the effects of “stress”

they seek poorly correlated asset classes which, because they are driven by

different economic forces, tend not to move up and down together. This is the

essence of portfolio diversification. The trouble is that traditional diversification

often fails when you most need it. The correlation and volatility of most ostensibly

poorly correlated assets tend to converge during financially unstable periods.

Gold’s pre-eminent investment characteristic is its very low or, in this particular

time period, negative correlation with other commonly held asset classes. And

this correlation tends to fall further during periods of financial instability. This,

of course, is what investors seeking effective diversification demand. With its

specific investment attributes, gold, you could say, has been designed for port-

folio risk management. Gold is as relevant today as it ever has been.

The investment environment, of course, is highly dynamic. It veers without

warning between stable (non-stress) and unstable (stress) periods. Here we can

see an aggressive portfolio designed for a stable climate. That’s going to per-

form poorly in stress periods. Here it is, designed for a non-stress environment

and that’s what happens when you discover that the period has changed. And

this is what happens, here, if you design your portfolio very conservatively; it’s

designed for a stress environment. All of a sudden, you find that you’re not in a

stress environment, and there are examples of pension funds that have suffered

severely in the past year from having positioned their portfolios, apparently,

wrongly. They have lost mandates and so on. Equally, conservative portfolios

will underperform in a benign investment climate.

What we can show, is that even a modest weighting of gold can improve the

consistency of a wide range of portfolios. And so in gold, not surprisingly, that’s

what happens if you’ve got a portfolio containing gold. In other words, portfo-

91

Normal and abnormal curves

Normal

Leptokurtic

Leptokurtic,

negatively skewed

-4 -3 -2 -1 mean 1 2 3 4

Standard deviation from the mean

lios that contain gold are generally more robust than those that do not. They’re

better able to cope with these sudden changes in investment climate. Now,

please forgive me, a bit of statistics but it is important to understanding how

these things work.

An underlying assumption of most asset-allocation studies is that the returns on

individual assets in a portfolio are normally distributed. Normal distribution is

often referred to as a bell curve and, in the world of the bell curve extreme

outcomes are rare; 95 per cent of the time normally distributed returns will fall

within two standard deviations of the mean. But in the real world of stock

markets the returns of most asset classes are not normally distributed. There is

a higher proportion of outliers, here you can see they go well out beyond the

standard deviations. Such a distribution of returns is, for obvious reasons, de-

scribed as “fat-tailed”. Skewness is also a problem as you can see here. Portfo-

lios are skewed from the mean.

During the 12 months to June 2001, the quarter preceding the tragedies in the

United States, the S&P 500 index experienced four daily moves that traditional

risk indicators suggest should occur no more than once every 120 years. Of

course nobody believed that markets would be OK for the next 500 years, but

that is what the numbers said and those are the sort of numbers on which port-

folios are built.

We have also looked at what happened to a number of different markets during

the month just prior to 911 and the month following 911. These are the figures

which show the percentage of days where there were excessively high returns or

excessively low returns, in other words, less than two standard deviations. As

92

Low volatility is important

Portfolio 1

(low volatility)

Portfolio 2

(high volatility)

Annual

return %

Value Annual

return %

Value

Initial value 10,000 10,000

Year-end 1 9 10,900 -5 9,500

2 11 12,099 25 11,875

3 9 13,188 -5 11,281

4 11 14,639 25 14,102

5 9 15,956 -5 13,396

6 11 17,711 25 16,746

Arithmetic

av. return

10% 10%

Std. deviation 1.10% 16.43%

Compound

return

9.996% 8.972%

you can see, there weren’t many excessively high returns but even before 911,

there were really quite a lot of excessively low returns. During the month fol-

lowing, here in the UK, we got up to 50% of the time the market was abnormal.

So that lets me remind you that if returns were normally distributed daily moves

of that magnitude should occur no more than 5 per cent of the time.

Or indeed, if you look at these tails, no more than 2.5% of the time. So the

combination of fat tails and negative skewness results in a disproportionate

number of underperforming returns in the left-hand tail. The inclusion of gold in

a portfolio serves to mitigate those results. And indeed, it does so more effi-

ciently than T Bills.

It is not always appreciated that holding gold in a portfolio can enhance the

overall rate of return. And the gold price does not have to go up for that to

happen. The reason is that gold can reduce the overall level of volatility or risk

of a portfolio, which means that you can benefit from the mathematical effect

of compounding quite apart from being able to add higher yielding, riskier assets

without increasing your target level of overall portfolio risk. Here, I’ve got a

high volatility portfolio and a low one. The numbers are purely arbitrary. Both

parts have the same arithmetic average. Clearly, the volatile one has a very

much higher standard deviation. What gold can do is give the lower volatility

portfolio a significantly higher compound return.

At this stage you probably expect that every fund manager in the world already

has a significant weighting of gold in his portfolio. If only that were the case!

The majority of investment professionals are unaware of the role that gold can

play as a portfolio diversifier. Bearing in mind the twenty-year downtrend in the

dollar price of gold, it is difficult not to feel a degree of sympathy with that

93

Gold and equity

trends: 1970-2000

S&P 500 JANUARY 1970— December 31,

2000

0

200

400

600

800

1000

1200

1400

1600

65 67 69 70 72 74 75 77 79 80 82 84 85 87 89 90 92 94 95

GoldJANUARY 1970— December 31,

2000

0

100

200

300

400

500

600

700

800

65 67 69 70 72 74 75 77 79 80 82 84 85 87 89 90 92 94 95

• This pattern has held over

the past three decades

• Since the early 90’s:

– stock returns have

diverged dramatically

above their mean

– while gold has done the

opposite

• Reversion to the mean?

Gold and the US long bond

80 85 90 95 00

US

$ p

er o

unce

200

300

400

500

600

700

800

900

Yield per cent

5678910111213141516

Bonds Gold

view. Gold has closely tracked the decline in inflationary expectations as ex-

pressed in the yield on the US long bond. The US long bond has ceased to exist,

or will do so very shortly. But if this sort of trend continues I wonder how long it

will be before the spectre of deflation strikes in the US and elsewhere and in-

deed we heard the deflation word earlier today. On the other hand, as an econo-

mist might say, perhaps we are about to enter a period of rising inflation. I’ve

heard it said that it may be the only way to get out of the economic mess that

we now find ourselves in, particularly perhaps in Japan.

The point is that the future is always uncertain. It is for that reason that gold

should not be ignored. Of course investors should do their own due diligence

and then decide for themselves whether to invest or not. But continuing to

ignore gold I believe is imprudent; it could actually be an abrogation of their

fiduciary responsibilities.

94

Gold vs. Equities

Ratio of Dow Jones Industrials to Gold1895- 2000

- 0

- 10

- 20

- 30

- 40

1880 1900 1920 1940 1960 1980 2000

1928

1965

20002000

Gold has also suffered from the extraordinary strength of equities in the 1990s in

particular. The lower chart shows how dramatically stock indices, in this exam-

ple the S&P500, the period 1970 to December of last year. You can see how

dramatically stocks have diverged from their long term mean. Even after the

set backs of the past 18 months or so, many feel that valuations remain stretched.

Reversion to trend has been threatening for some time. The recent past has

done no more than accelerate what was already lurking there.

Conversely, the upper chart is the gold price in US dollars and that shows you

how far it has fallen beneath its long-term trend. And yet annual consumption

outstrips mine production by nearly 50 per cent while production itself may be

expected to fall in the medium term. It might be rational to expect both equi-

ties and gold to revert to their respective trends.

In fact it appears that they may already be on the way to doing so. This chart

shows the ratio of the Dow Jones industrial index to the gold price in dollars;

basically, it means “How many ounces of gold do you need to buy one unit of the

Dow?” And you can see, in 1928, you needed about 18, in 1965, you needed

about 28, last year at the peak, you needed about 45, but by the year end it

came down to 40. At the moment, it’s standing at around 34/35, or it was earlier

this morning. I leave it you to work out what this could imply for the levels of

the Dow Jones and of the gold price should it once again take only 10 ounces of

gold to buy one unit of the Dow.

The majority of investors are unaware also of gold’s market fundamentals. Mr

Panizzutti told us earlier today about the European Central Bank Agreement on

gold. Even those investors who have heard, for example, of this Agreement have

little understanding of its implications for the market. Prior to the agreement,

clearly investors were led to fear an overwhelming tidal wave of central bank

95

Gold - Some market fundamentals

• European Central Bank Agreement on Gold caps

sales and lending by central banks

• Only 15% of official sector gold is “loosely held”

• Dramatic downturn in gold exploration

• Annual consumption outstrips production by more

than 40%

• Mine production could fall by 35% by 2005

selling swamping the market. I find that to a great extent they still do, even

though, certainly in terms of the Agreement, that danger has receded dramati-

cally. Some 85% of official sector gold holdings are either subject to the Central

Bank Agreement or are in holdings where the holders have assured us that they

are not going to sell. A major part of this balance, which is 15% and could be

described as loosely held, although some part of it may be more tightly held

than loose implies, has already been mobilised in the market and is no longer

available for sale at least not at the moment.

Neither are many investors aware of the dramatic downturn in gold exploration

expenditure, by more than 60 per cent from over the last four years, and what

that implies for the future of newly mined gold supply. Some recent research

suggested that, absent a significant upturn in the gold price, global production

could fall by as much as 35 per cent over the next five years. Even if this is an

extreme case, we should not ignore that.

It seems to me that the logic of holding gold as a portfolio diversifier is increas-

ingly compelling. If you want total independence of course you must buy gold

bars and store them in your own vaults. But for many professional investors,

that may not be practical, whom although they would like to allocate some

portfolio weighting towards an asset with gold’s special investment attributes,

find the concept of taking delivery of gold bars difficult to accept as indeed they

would taking delivery of scrip. There are investment vehicles which can perhaps

meet their needs.

Depository schemes or metal accounts, some of which may come with a govern-

ment guarantee also give a choice of holding gold on either an allocated, that is

segregated, or an unallocated basis. In the latter case you can put it on interest

bearing deposit although the security then becomes dependent on the security

of the bank itself.

96

24

Gold - identified professional purchasesGold - identified professional purchases

Year Tonnes

1997 50

1998 57

1999 60

2000 91

2001 (h1) 45

303

Ways of buying gold

• Depository schemes

• Metal accounts

• Accumulation plans

• Futures and options

• Bonds convertible into gold

A common criticism of gold is that it provides no income and this is particularly

the case for pension funds. A gold linked convertible bond provides a securitised

investment in gold and is backed by gold. It is a hybrid, combining most of the

attributes of an investment in gold itself with all the advantages of a bond. An

important benefit is that it enables an investor to buy gold with an income. And

not only an income but also, if they want, capital protection. If you issue it at a

premium it can be structured so as to carry a higher coupon. Or you can issue it

at a discount and create a zero coupon. In short, the variables that can be built

into such an instrument are such that it can be tailor made to meet the needs of

practically any investor.

During the past four years we have identified some 300 tonnes of institutional

investment consumption of gold. Increasing numbers of professional investors

are buying gold as a portfolio diversifier.

I expect their ranks to grow as they learn how gold can address the main prob-

lems associated with traditional methods of asset allocation and products are

created to meet their needs. They are coming to realise that gold is a credible

and desirable alternative investment with which to diversify.

Of course, as I said earlier, none of us wants too dramatic a reversion to the long-

term mean price levels for either equities or gold. But it does seem that current

market uncertainties or investment risks are perhaps greater than most of us have

ever experienced. Gold can no longer be ignored, must no longer be ignored.

97

Challenges for Europe: the euro, the dollar and gold:

Closing address

Robert Pringle

Corporate Director, Public Policy & Research

World Gold Council

Ladies and Gentlemen: it falls to me now to close this conference and to thank

this panel of speakers and all of you. It is indeed an honour for us at the World

Gold Council to have hosted the third in this series of annual economic confer-

ences – we’ve had Paris, Rome and Berlin, and some of you have actually come

to all three of these conferences, and thank you so much for doing that. The idea

behind these conferences has been to look at gold in a broad economic and

financial context. For central bankers, the key issue is always that of policy;

policy not just in relation to gold itself but in relation to the markets, exchange

rates, international monetary system. Gold brings in all these things, including

the role of the International Monetary Fund, and many other things besides.

We have heard today about all these subjects from some of the world’s leading

authorities on them. On behalf of the World Gold Council, I would like to thank

them all for their contributions. We will be sending the proceedings of this con-

ference to all the participants here today. We would like to thank you for coming

to Berlin. We’ve not yet settled on a city for next year’s conference, and any-

body with a strong preference for one is welcome to make suggestions. I would

like to thank all our panel of speakers and my colleague, Benedikt Koehler, for

having chaired this day’s session.

And with that, I call the conference closed. Thank you so much.

99

No. 1 Derivative Markets and the Demand for

Gold by Terence Martell & Adam Gehr Jr

April 1993

No. 2 The Changing Monetary Role of Gold

by Robert Pringle, June 1993

No. 3 Utilizing Gold Backed Monetary and

Financial Instruments to Assist Economic Re-

form in the Former Soviet Union by Richard W

Rahn, July 1993

No. 4 The Changing Relationship Between

Gold and the Money Supply by Michael Bordo &

Anna Schwartz, January 1994

No. 5 The Gold Borrowing Market - A Decade

of Growth by Ian Cox, March 1994

No. 6 Advantages of Liberalizing a Nation’s

Gold Market by Prof Jeffrey A Frankel, May 1994

No.7 The Liberalization of Turkey’s Gold Mar-

ket by Professor Ozer Ertuna, June 1994

No. 8 Prospects for the International Monetary

System by Prof Robert Mundell, October 1994

No. 9 The Management of Reserve Assets

Selected papers given at two conferences,1993

No. 10 Central Banking in the 1990s - Asset

Management and the Role of Gold Selected

papers given at a conference on November 1994

No. 11 Gold As a Commitment Mechanism:

Past, Present and Future by Michael D Bordo,

January 1996

No. 12 Globalisation and Risk Management

Selected papers from the Fourth City of London

Central Banking Conference, November 1995

No. 13. Trends in Reserve Asset Management

by Diederik Goedhuys and Robert Pringle

September 1996

No. 14 The Gold Borrowing Market: Recent

Developments by Ian Cox, November 1996

No. 15 Central Banking and The World’s Finan-

cial System Collected papers from the Fifth City

of London Central Banking Conference

November 1996

No. 16 Capital Adequacy Rules for Commodi-

ties and Gold: New Market Constraint? by Helen

Junz and Terrence Martell, September 1997

No. 17 An Overview of Regulatory Barriers to

The World Gold Trade by Graham Bannock, Alan

Doran and David Turnbull, November 1997

No. 18 Utilisation of Borrowed Gold by the

Mining Industry; Development and Future Pros-

pects by Ian Cox and Ian Emsley, May 1998

WGC CENTRE FOR PUBLIC POLICY STUDIES

Available from Centre for Public Policy Studies, World Gold Council, 45 Pall Mall,

London SW1Y 5JG, UK. Tel + 44.(0)20.7930.5171, Fax + 44.(0)20.7839.4314.

E-mail: [email protected]

No. 19 Trends in Gold Banking by Alan Doran,

June 1998

No. 20 The IMF and Gold by Dick Ware

July 1998

No. 21 The Swiss National Bank and Proposed

Gold Sales, October 1998

No. 22 Gold As A Store of Value by Stephen

Harmston, November 1998

No. 23 Central Bank Gold Reserves: An histori-

cal perspective since 1845 by Timothy S Green

November 1999

No. 24 Digital Money and Its Impact on Gold:

Technical, Legal & Economic Issues by Ricahrd

Rahn, Bruce MacQueen & Margaret Rogers

November 2000

No. 25 Monetary Problems, Monetary Solutions &

The Role of Gold by Forrest Capie and Geoffrey

Wood, April 2001

No. 26 The IMF and Gold Revised Edition by Dick

Ware, May 2001

Switzerland’s Gold, April 1999

A Glittering Future? Gold mining’s importance

to sub-Saharan Africa and Heavily Indebted Poor

Countries, June 1999

Proceedings of the Paris Conference “Gold and

the International Monetary System in a New Era”,

May 2000

Gold Derivatives: The Market View

by Jessica Cross, August 2000

The New El Dorado: The Importance of Gold Min-

ing to Latin America March 2001

Gold Derivatives: The Market Impact

by Anthony Neuberger, May 2001

Burning Bright: The Importance of Gold Mining to

the Asia-Pacific Region, Sept 2001

Proceedings of the Rome Conference “The Euro,

The Dollar and Gold”, Oct 2001

The Golden Road: the Importance of Gold Mining

in the CIS and Eastern Europe, Oct 2001

100

Headquarters

45 Pall Mall

London

SW1Y 5JG, UK

Tel. +44.(0)20.7930.5171

Fax.+44.(0)20.7839.6561

Website:

www.gold.org

Americas

Regional Office & USA

444 Madison Avenue

New York,

NY 10022

Tel. +1 212.317.3800

Fax. +1 212.688.0410

Brazil

Avenida Paulista 1499

Conj. 706

01311-928 Sao Paulo

Tel. +55.11.3285.5628

Fax. +55.11.3285.0108

Mexico

Consejo Mundial del Oro

Av. Reforma No. 382,

Despacho 701,

Col. Juarez

Delagacion Cuauhtemoc

06500 Mexico D.F.

Tel/Fax +52.55.5514.5757/

172

East Asia

Regional Office &

Singapore

6 Battery Road No. 24-02A

Singapore 049909

Tel. +65.227.2802

Fax. +65.227.2798

China (Beijing Office)

Room 1706,

Scitech Tower

22 Jian Guo Men Wai Da Jie

Beijing 100 004

Tel. +861.0.6515.8811

Fax. +861.0.6522.7587

World Gold Council Offices

China (Shanghai Office)

Unit 3504, 35th fl.,

Plaza 66, 1266 Nan Jing

Road (West), Shanghai, PRC

200 040

Tel. +86.21.66289.2111/

2555

Fax. +86.21.6289.3222

China (Hong Kong)

Unit 603, Low Block,

Grand Millennium Plaza 181

Queens Road Central,

Hong Kong

Tel. +852.2521.0241

Fax. +852.2810.6038

Indonesia

Tamara Center Level 6,

No 602

Jl. Jenderal Sudirman Kav 24

Jakarta 12920

Tel. +62.21.520.3693/94/95

Fax. +62.21.520.3699

Malaysia

Menara Dion No. 12-05

27 Jalan Sultan Ismail

50250 Kuala Lumpur

Tel. +60.3.381.2881

Fax. +60.3.381.2880

Thailand

14th Floor, Thaniya Plaza,

52 Silom Road, Bangrak

Bangkok 10500

Tel. +662.231.2486/7

Fax. +662.231.2489

Taiwan

Room 808,

205 Tun Hwa N. Road,

Taipei

Tel. +886.2251.47.400

Fax +886.2251.47.466

Vietnam

No 6 Phung Khac Khoan St,

Room G7

District 1,

Ho Chi Minh City

Tel. + 848 8256 653/654

Fax + 848 8221 314

Japan/Korea

Regional Office & Japan

Shin Aoyama Bldg/W21F,

1-1-1 Minami-Aoyama

Minato-ku, Tokyo 107 0062

Tel. +81.3.3402.4811

Fax. +81.3.3403.2477

South Korea

19th Fl, Young Poong Bldg.

33, Seorin-dong, Jongro-ku

Seoul 110 752

Tel. +82.2.399.5377

Fax. +82.2.399.5372

Middle East

Regional Office & UAE

Dubai World Trade Centre

Level 28 P.O. Box 9209

Dubai, UAE

Tel. +971.4.3314.500

Fax. +971.4.3315.514

Turkey

Mim Kemal Öke Caddesi

Dost Apt. 8/4

Nisantasi 80200 Istanbul

Tel. +90.212.225.1960/22

Fax.+90.212.225.1913

India

Regional Office &

Mumbai

101, Maker Chamber VI

10th fl., 220 Nariman Point

Mumbai 400 021

Tel. +91.22.230.1323

Fax. +91.22.230.1324

India (Chennai Office)

B-2 Alexander Square

34/35 Sardar Patel Road

Guindy Chennai 600 032

Tel.+91.44.230.0083/0084

Fax.+91.44.230.0086

India (New Delhi Office)

47, Basant Lok, Vasant Vihar

New Delhi 110 057

Tel. +91.11.614.9394/95

Fax. +91.11.614.8281

Co

nferen

ce on

Go

ld: Th

e Euro

, the D

ollar an

d G

old

, Berlin

Novem

ber 2001

WORLD GOLD COUNCIL

Published by

World Gold Council45 Pall MallLondon SW1Y 5JG

Tel: +44 (0) 20 7930 5171Fax: +44 (0) 20 7839 6561e-mail: [email protected]: www.gold.org

The Euro, The Dollar and Gold

Documents

Transcript of The Euro, The Dollar and Gold