Programme: WORLD BUSINESS REVIEW
Station: BBC WORLD SERVICE RADIO
Date: 04/12/2004

Karen Hoggan: BBC Presenter
Paul Walker: CEO, GFMS Limited
Jill Leyland: Economic Advisor to World Gold Council
Kamal Naqvi: Metals Analyst, Barclays Capital

KAREN HOGGAN: Presenter
Few things arouse the passions like gold. The greed for it is the stuff of criminal fantasy. And right now gold's even more desirable. Its price has shot up and has been trading at more than $450 an ounce, its highest level for 16 years. Over the last few days it's fallen back slightly but it's still nearly $200 more expensive than in the late '90s. At the same time, the dollar, which replaced gold as the world's reserve currency - in other words, the currency used to settle international debts - has been tumbling in value, dropping to new lows against the euro and the Japanese yen as currency traders worry about America's massive budget and trade deficits. The question is: are we seeing gold re-emerge as the reserve asset, a position it lost in 1971 when President Richard Nixon unhitched the dollar from gold.

RICHARD NIXON: Former US President (1971 Broadcast)
I directed secretary Connolly to suspend temporarily the convertibility of the dollar into gold or other reserve assets except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.

KAREN HOGGAN:
Or is it simply a case of the price of gold rising because the value of the dollar is falling? After all, gold's price in euros has stayed pretty much the same. Well the financial world is divided on the issue, so to discuss this I'm joined by Jill Leyland, economic advisor to the World Gold Council, Paul Walker, the chief executive of the precious metals consultancy GFMS ,and Kamal Naqvi, metals analyst at Barclays Capital. Hello to you all.
First of all, Jill Leyland. Where do you stand on this whole issue? I imagine you believe that we are seeing a resurgence in gold's fortunes.

JILL LEYLAND: Economic Advisor to World Gold Council
Yes I think that's true. We don't see it coming back as a reserve currency, no, but there has certainly been a resurgence of interest in it as an investment in the West. I think there… there's a whole cocktail of reasons for this. First of all, you mentioned the weak dollar and that's certainly part of it. Gold is a statistically proven dollar hedge. But there's more to than that because gold is seen as a safe haven as an insurance. It's what people turn to when they're concerned about the future. Now over the last few years we've seen declining stock markets, we've seen some economic recovery but possibly built on rather fragile foundations, and of course we've had all the political worries of the last few years.

KAREN HOGGAN:
Kamal Naqvi at Barclays Capital, where do you stand on that then?

KAMAL NAQVI: Metals Analyst, Barclays Capital
I think that the issue in terms of the dollar is unquestioned. What we're seeing is an unbelievably high correlation between the price movements in the gold price and the price movements of the euro, so high a correlation that it's statistically improbable. What's clearly occurred is the speculative community has decided to trade gold using the euro as their trading tool. A much more important issue has been the resurgence of interest in terms of commodities as a whole. What you've seen is commodities on the whole over the last three years have resurged as assets of interest to a wide number of investors. In that context gold has actually under-performed. It's not as strong as the energy complex, it's not as impressive as the base metals complex. It's not seen as much money come into those sectors either.

JILL LEYLAND:
Yes Kamal, gold certainly is a commodity but it is other things as well. It does have the historical connotations and the cultural affinity of gold as money and so you do see, I think, more to it, a lot more to it, than just a commodity story.

PAUL WALKER: Chief Executive, GFMS
Gold is… as Jill says, has got different characteristics at different times. There are still elements of the reserve nature of gold is still something that occupies people's minds and, you know, you just have to travel around and speak to people who are involved in this market to see people talking about it in that way. Even though it was decoupled back in… in the early '70s from the International Monetary System it still occupies people's minds. And let's not forget that the central banks of Europe still hold considerable amounts of gold against their liabilities.

KAREN HOGGAN:
But a lot of the central banks are actually selling off their gold reserves aren't they? I mean, they don't seem to think that it's so crucial to have as much as they used to.

PAUL WALKER:
You're seeing a readdressing of the imbalances that emerged partly a function of the monetary system that existed under Bretton Woods. The truth of the matter is that the central banks in Europe hold variously nearly, you know, 50, 60, 70 per cent of their assets in gold. Those very heavy holdings of gold are an imbalance and that you need to have a look at a slightly more balanced portfolio.

KAMAL NAQVI:
It's actually much more than just balance. The problem is that gold gives you no yield and the reality is, particularly in Europe with the national central banks no longer effectively being proper central banks given that the ECB takes those monetary roles, effectively being portfolio managers, and they are being judged on yield.

JILL LEYLAND:
Yes but you have to remember that central banks don't just hold gold for historical reasons. There are also other arguments for them to hold some gold, even though some of them may, for historical reasons, have too much at the moment. If a central bank holds gold reserves then this helps public confidence in the currency of that country.

KAMAL NAQVI:
Do you think the Canadian central bank has lost the confidence of its public because it's sold its gold?

JILL LEYLAND:
I can't tell you about Canada but I can tell you, however, we have tested this with surveys. We have found that a surprisingly high proportion of the public, and I have to say the figures surprised even us, do feel that when a central bank or a government holds gold that this does add support to the currency and help confidence in it.

KAREN HOGGAN:
The gold standard fell apart because it was no longer sustainable. It's successor collapsed when the US could no longer keep it going. So why should today be any different in terms of faith in gold essentially?

JILL LEYLAND:
I think one point that you have to bear in mind is that the global monetary system is not something that endures for a very long time. The gold standard itself in its classic form only lasted from about 1870 to the first world war. After that we had a sort of inter-reckoning between the wars, and then after the war we had Bretton Woods for a while and then we had a period of mainly floating currencies in the last 20 or 30 years.

KAREN HOGGAN:
Aren't flexible exchange rates preferable because you're not going to get central banks to rely solely on gold, you're not going to get the US or Europe, the European Union for example, giving up their control over their interest rates or their taxation system are you?

PAUL WALKER:
What you're really looking at is trying to achieve some sort of reasonable balance. Now, you know, my… I'm kind of inclined to think of the Aristotelian golden mean and it never really means anything but it means everything. You try to find some sort of balance of… of what central banks hold, what the system of exchange should be, and it's been shown that under entirely flexible exchange rates - you look at the pressures that came to bear on the east Asian countries in the 19… late 1997 and early 1998, and it's interesting that Malaysia at that time actually put a cap… they put capital controls in place. It shows you that, you know, you don't have a one size fits all policy here, and I think, just to come back to the gold theme, it really is one of those issues that it's not an absolutist argument that everything should be exchangeable into gold or that gold should indeed be the major reserve currency, and Kamal has made an interesting point. It's kind of curious that the central banks of the European… the eurozone are now really becoming, as he said, portfolio managers and it's an odd thing to see a central bank being primarily yield-driven as opposed to ensuring the value of their… of their currency.

KAREN HOGGAN:
So they've become more commercial essentially.

PAUL WALKER:
Well I think that's true and whether that's a problem for gold, well, it will remain to be seen, but the fact of the matter is once you put portfolio managers in that position, the chances are that if they are yield-driven then gold, as Kamal said, doesn't have a yield, they will look to move to other assets.

JILL LEYLAND:
I'd like to pick up, though, on the point of balance because we have commissioned research which is going to be published next year looking precisely at ideal portfolio compositions for central banks, and this is just looking at the pure sort of return and risk elements, leaving aside what you might call the traditional arguments for gold, and that does show that in most cases there is a good argument just on those grounds for a proportion of gold in a central bank's portfolio.

KAMAL NAQVI:
We have done a simple analysis which says… suggests if you replaced all their gold with an investment in the Goldman Sachs Commodity Index then their return and risk improves dramatically compared to holding gold, so the risk-returns can be used to prove almost any point. The point is that they're going to be chasing yield. There is no getting away from that. There is an argument of course about whether or not some of the Asian central banks, who hold as a percentage of their reserves very little gold, as to whether or not they will increase their reserves in gold and indeed of course of euros and other currencies.

KAREN HOGGAN:
A question to all of you. Where does gold go from here? What does the future hold?

PAUL WALKER:
The dollar has a lot to play… a role to play over the next 6-12 months. The outlook for dollar-gold is going to be tightly linked into that. I think there are some underpinning genuine portfolio shifts into gold. Our view is the dollar-gold price still has some upside potential, in spite of it being at 16-year highs.

KAREN HOGGAN:
Jill?

JILL LEYLAND:
I think the change we've seen in the last two or three years has been a resurgence of investor interest. As an asset which was almost ignored by many institutional investors throughout much of the 1990s, just simply judging by the number of inquiries we're getting, by the interest in the research that I and my colleagues do, and indeed also by some active purchasing, we are seeing I think the start of a new era, or new short-term era anyway.

KAREN HOGGAN:
And Kamal, a final word from you.

KAMAL NAQVI:
I mean, our outlook is somewhat more positive on the world than that of Paul and Jill's. You know, we do see growth next year, we do see the dollar stabilising recovery, and we do believe that… that as a result, a lot of the speculative interest, which we believe is substantial, will exit the gold market. The one thing that will endure, though, which hasn't been touched on before, is gold ultimately is the ultimate irrational investment. As soon as we try and quantify exactly why people buy gold, and immediately you can show other assets are better, and in the current world, with our irrationality being extremely high with uncertainty being extremely high, that is why ultimately gold is being considered, and if currencies remaining where they are we will continue to see interest grow. But whether or not that dollar link remains through to next year and we come off and we come off worse than people expect, I think that's the part that remains open to question.

PAUL WALKER:
Can I interject? I think the interesting thing is that Kamal uses the term irrational, then there are a lot of people out there who are very irrational and that, I guess, is the final curiosity of the gold market. If that is indeed the case, there are a lot of irrational people who are getting into the market and who I think will remain there.

KAREN HOGGAN:
Well we're not going to get much of a consensus among all three of you but we're going to have to finish there. Thanks to all of my guests: Jill Leyland of the World Gold Council, Paul Walker from the precious metals consultancy GFMS, and Kamal Naqvi of Barclays Capital.