Mark to Market: All That Glitters Is Not Gold, Paris ( Dow Jones )

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By David G. Pearson
A Dow Jones Newswires Column
Paris ( Dow Jones ) May 21, 1999

One of the most interesting things about this job is that you get to rub shoulders with the world's financial movers and shakers.

This is great cocktail party conversation fodder for impressing your fellows about Bob, Alan and Larry and how their tennis games are improving.

In this neck of the woods, however, the party chat about Dominique, Jean-Claude, Hans and Wim tends to be less interesting than the punch bowl.

It's typically about who's next in line to take over which financial institution and why he'll be no good because he went to the wrong high-falutin' school 30 years ago.

But my ears did prick up the other day when I was schmoozing with Bank of France officials in the Central Bank's golden gallery, an overpowering setting of gilt, mirrors and painted ceilings designed to make you feel inferior, whatever your net worth.

BOF Governor Trichet was commenting on his policy regarding official gold reserves at a time when the solidarity of central banks is fraying at the edges.

You'll recall that the foundations of the bastion of confidence in gold as the central banker's nuclear weapon were rocked on May 7 when the Bank of England announced plans to auction off half of its gold stocks. The BOE sale will involve a few hundred tonnes of the stuff.

And it's looking increasingly likely that the IMF is going to liquidate at least 10 million ounces of its gold reserves to generate income for financing debt relief. That, incidentally, is necessary because some governments are scared to ask their lawmakers for more money for poor folks.

Central banks in Belgium, Argentina, Canada, Australia, The Netherlands have also been selling off their bullion bars in recent years, simply because it's a non-performing asset and they're under increasing pressure to create income.
Understandably, the bullion market has got the heeby-jeebies. The price of bullion plunged to its lowest level in 20 years this week, and gold mine shares have lost 20% over the past fortnight.

Finger in the Dike

And now I see that a group of gold investors in the U.S. has formed the Gold Anti-Trust Action Committee with it own web site ( www.gata.org ) giving evidence of alleged collusion among financial institutions and central banks to keep the price of gold below $300 an ounce. Friday morning's London gold fixing was $274.85.

GATA's aim is to expose huge speculative short positions taken by financial institutions and bullion banks. Their theory is that buyers will flock back to the market when they realize the global short position is too large to close without causing a substantial rise in the price.

To get back to the BOF's gilded halls, Trichet was saying with almost religious fervor that The Bank of France has no intention of selling one gram of the 3,184 tones of bullion under our feet.

Like the legendary Dutch boy bravely plugging the hole in the dike with this finger, Trichet argued that the central banks of the U.S., Germany, France, and Italy - the world's four biggest holders of gold - will keep their gold stocks intact.

This suggests that gold bug central bankers, worried sick by the prospect of dwindling balance sheets, have been consulting with each other, and that Trichet is their unofficial spokesman. Central Banks in the euro-zone can't sell any gold without the ECB's assent.

The conservatism is all the more surprising in view of the fact that the Bank of France's annual report, which Trichet was presenting, reveals that the book value of France's gold holdings dropped by $3 billion last year due to the fall in the market price without a gram being sold.