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UK plans to sell 415 tonnes of gold

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Switzerland is likely to follow the suit which might result a slump in gold market worldwide

By Syed M. Aslam
August 9 - 15, 1999

The UK Treasury, on May 7, announced plans to sell 415 tonnes of Britain’s gold reserve in phases over next several years. As per announcement, the Bank of England, on July 6, auctioned the first 25 tonnes of gold. Now under the programme, similar quantities will be sold in September and November this year and January and March next year. Detailed plans for auction in 2000-01 and beyond will be announced later but the arrangements are likely to be similar to the earlier auctions.

UK plans to auction approximately 60 per cent of its total gold reserves which stood at 715 tonnes at end April this year. The auction has sent ripples in the bullion markets across the world as prices dipped to record twenty-year low. Gold prices in Pakistan have dropped by Rs 250 per tola (11.54 grams) since the UK gold auction. On Thursday, August 5 it stood at Rs 5,270 per tola, Rs 30 lower than the price of previous day.

The substantial reduction in price, however, has not benefitted the jewellers in Pakistan. In fact, they agree that reduction of gold prices globally has a diametrically oppposite effect of the sales.

Talking to PAGE, former chairman of All Pakistan Gems and Jewellers Association, Mahmood Choksy said, "Potential buyers are expecting that the international gold prices would drop further. It seems as if the potential customers are holding on to their money for better prices sometime in future."

He expressed concerns that the impact of low gold prices worldwide would not augur well for the gold market in Pakistan. "The more the reduction in gold prices the more the buyers, particularly those who buy gold for investment purposes, will lose their interest in buying the precious metal," he said.

In developed economies like Britain, the low gold prices have the potential to boost gold and jewellery sales but for a market such as Pakistan it is having a totally opposite effect. This is primarily due to big difference in the purchasing power of a customer in a developed and developing country.

The impact of gold sales by the UK, expected to be followed by Switzerland, will change the general perception about gold as a major form of investment in Pakistan. The reduction in global gold prices and the declining prices will change the trend about investment in the precious commodity causing loss to many investors.

He said that the auctioning of huge quantity of gold by the UK has changed the face of the gold business, particularly in Pakistan. Previously the gold prices always subjected to fluctuations which offered solace to the buyers that they would be able to sell gold to jewellery at a profit. Today people have no such assurance that today’s low would be replaced by a high tomorrow. This lack of confidence will hurt gold sales as a form of investment in Pakistan.

The purchase of gold jewellery in Pakistan, even if it is given as dowry to a girl on her marriage by the parents, however, is a fact that no marriage is considered complete without gold jewellery. With the changing trend the gold is feared to lose its value as a major investment item, Mahmood added.

Abdul Wahah, a jeweller in Hydri Market, told PAGE that the low gold prices have failed to register any response on the overall sales. He felt that declining prices would not have any beneficial impact in the Pakistani market primarily due to political uncertainty and decreasing purchasing power. People still buy gold jewellery but over the years there has been a tendency to go for lighter ornaments to suit the budget. Fifteen years ago, people used to buy much heavier gold sets for weddings but today the majority go for much lighter sets, he added.

The Chairman of South African Gold Mining Company, Anglogold, which is the world’s largest gold producer, Nicky Oppenheimer has blamed that UK gold auction would cause a serious loss to the global gold market. There are speculations that after the UK gold auction more central banks worldwide would follow the suit and sell their gold reserves.

The speculation seems to be true as the IMF, backed by the US treasury, also wants to sells 10 million ounce of its total gold holdings of 103 million ounce over several years to help relieve the debt of 41 of the world’s poorest countries. The proposal has moved a number of US lawmakers to block the gold sales by the IMF. The World Gold Council has also taken its case to the United Nations on the plea that it would put scores of poor nations in Africa, for instance Ghana, further in debt.

The decision to auction 415 tonnes of gold by the UK has already helped push gold to a twenty-year low of $ 252.80 an ounce in the third week of July. Gold has slumped from $ 291 an ounce at the beginning of this year and lost around $ 35 or 12 per cent since the Bank of England announced the gold sales plan in early May. The gold price in the UK is the lowest since May 15, 1979.

Despite strong verbal opposition by the gold producing countries and World Gold Council, the marketing arm of a number of world gold miners, UK has said that it has no plans to alter sales of its gold reserves.

Farooq Qureshi, the general secretary of Karachi Saraf [bullion] and Jewellers Group, blamed the economic scenario which has divided the people into two basic classes, the rich and poor. In practice there is no more a middle-class to fuel the economy, he added.