IMF plan to disburse gold reserves opposed

JAKARTA (JP): The World Gold Council is opposing the International Monetary Fund's (IMF) proposal that central banks cash in some of their gold reserves to help the world's least- developed countries.

Leo Hadi, a representative of the council in Indonesia, said here yesterday that the plan would not benefit gold-producing countries like Indonesia.

Last week, the IMF proposed that central banks around the world sell some of their 160 tons of gold reserves to help lesser-developed countries. The proposal has been vehemently opposed by several European countries led by Germany and Switzerland. The United States supports the proposal.

Later this month, the IMF is to convene to decide whether the proposal is viable. The proposal must be accepted by at least 85 percent of its members to be approved.

"Selling gold reserves will only create economic instability... Its climax will be disaster for the gold mining industry which has been promoted in Indonesia," Leo said.

He explained that the initiative to sell gold reserves to finance large projects in developing countries would set a precedent for countries seeking funding for their projects.

If central banks in many countries sell their gold, there will be an oversupply of gold in the world market. Then gold prices will drop drastically which will force investors in gold mining companies to rethink further investment in the industry, Leo said.

Indonesia is the world's ninth largest gold producer, yielding 90 tons of gold a year. With recent findings of large gold reserves, it is projected that within the next ten years, Indonesia will capable of producing around 200 tons of gold a year.

Leo said that if the proposal was accepted, it would also effect downstream gold industries, including manufacturers of jewelry.

He said most Indonesian families used gold jewelry for savings. And if the IMF's proposal was endorsed, the people would prefer to buy pure gold for savings rather than gold jewelry because of the cost of workmanship involved.

"It will result in the collapse of the gold jewelry industry, which can be a leading contributor of foreign exchange in the future," Leo said.

Indonesia's gold jewelry industry has boomed in the last three years, with an average annual growth rate of 20 percent. Indonesia is predicted to become a leading exporter of jewelry.

Gold prices

The market has been sluggish lately because of rumors that the IMF is about to sell a large amount of gold. However, an expert in Hong Kong predicted yesterday that gold prices were likely to rise after the market had time to digest the news of the U.S. air strikes in the Middle East.

"This will hinder any upward rise," Herbert Cheung of the Hong Kong-China Gold and Silver Exchange was quoted by AFP as saying.

"It appears that the effect of the action by the U.S. army is so far neutralized by the rumor," Cheung said.

"But it is just a rumor at present. And the market will take time to digest the information from the Middle-East. After that then gold is likely to move up".

Gold is generally viewed as a safe-haven in times of crisis, Cheung added.

In mid-afternoon trade in Hong Kong, gold had risen to US$387.40-387.70 an ounce after opening the day at $386.33- 387.00.

Gold was slightly higher in early trading in Zurich, but the gain was not seen as resulting from the U.S. cruise missile attack on Iraq, dealers said.

In Sydney, Macquarie Equities gold analyst Grant Craighead said he expected interest in gold to increase "mildly but not dramatically" after the outbreak of hostilities in the Middle East.

"Historically, outbreaks of war or similar events have had a significant impact on gold but in recent times, this impact has been quite subdued," he said.

"Gold was always seen as a safe haven and currencies were seen to be at risk during war, but the ability to move money between different forms of securities has become much more flexible now, giving people more options to protect their money."

Craighead said gold, which closed at $387.10 an ounce in Sydney Tuesday from $386.65 the day before, had lacked volatility in recent months and was moving within a tight trading range.

"Investors like volatility and it provides opportunity... but although I would expect to see some upward pressure, it will be minor," he said. (rid)