NCPA - National Center for Policy Analysis

Declining Role Of Gold

December 8, 1997

The price of gold recently reached a 12 1/2-year low of under $300 per ounce. It may be that central banks no longer view gold as a monetary asset and investors no longer see it as a good inflation hedge.

Also, some European nations have sold gold to meet budgetary targets and the Asian financial crisis has reduced demand in an area where it previously was strong.

  • Just a few weeks ago Switzerland, long known as a nation of gold bugs, announced plans to sell more than half its gold reserves.
  • And the European Union has said that the new European Central Bank will probably not hold much gold to back the new common European currency.
  • The U.S. remains by far the world's largest holder of gold, with almost $80 billion worth at current prices (see figure) but it may be time to sell remaining U.S. reserves.

Gold had great value when interest rate controls prevented financial institutions from offering investors more attractive inflation hedges. But once interest rate controls were lifted, markets drove interest rates up, ensuring investors of a real rate of return no matter what the inflation rate was.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 8, 1997


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