Sunday, July 09, 2006

What to do with all this Gold?!?!

Here are some facts about the issue you should be aware of (Source: Executive Magazine):

  • Lebanon currently owns 9.22 million ounces of gold - which adds up to 286.8 tons
  • The gold was bought mainly during the 60's and 70's
  • It constitutes the largest gold reserve in the Middle East and North Africa
  • Lebanon ranks 19th in the world behind countries such as the UK, which owns 311.3 tons and Austria, which owns 307.5 tons. The first place in gold tonnage goes to the US, second place to Germany and third to the IMF.
  • Based on today's prices, the value of Lebanon's gold reserve is around $6.5 billion. That sum amounts to 32.5 percent of GDP and 16.25 percent of the national debt.
  • The gold is stored in the Federal Reserve Bank of New York and in the Banque du Liban vaults.

Now Comes the Question: What do you do with this gold?

a. sell it?
b. maintain the status quo?
c. do something else with it?

Lebanon's Executive Magazine says sell it!

Through an article titled "Waste of Space," the Executive Magazine presented the following argument in favor of selling Lebanon's gold reserve:

The money made from selling the gold could be used to alleviate Lebanon from its debt burden. If sold at today's prices the government will save more than $650 million a year in interest payments on the debt.

This argument was supported by the following facts presented in the article:

Lebanon currently manages to pull off a Primary Surplus. What does that mean? It means that if we disregard paying of interests on our debt, our government actually makes more money than it uses. Consequently, reducing our debt is now the primary means through which the government may reduce the hemorrhage we refer to as the "budget deficit."

Gold price cycles are very long. Today, they are at 25-year highs; but as soon as political tensions ease, or maybe Austria decides to sell a significant portion of its gold reserves, prices will deflate, and remain low for quite some time. Therefore, the Lebanese government should sell its reserves now, as doing so would result in a relatively profitable transaction.

The Lebanese gold simply does nothing. "Lebanon's gold reserves are sitting idly in vaults, yielding absolutely no return and costing the government in storage and safe keeping charges." A 1980's law forbids the Lebanese government from using the gold for anything. It can't be used as collateral for borrowing or as a hedging tool. In short, the initial intent for the gold to provide investors with confidence in Lebanon during tough times simply no longer exists because the gold is untouchable - it is as valuable to Lebanon as King Tutankhamen's treasure is to Egypt (actually less valuable, since the latter at least brings in tourist dollars)!


Okay... So those are the arguments presented by the Executive Magazine for selling the gold (with a little of my own salt and pepper). They seem very convincing, but I would have loved to read an article that argued for keeping the reserves in the same issue. Nevertheless, I am impressed because by publishing such an opinion, the Executive Magazine sends out a very subtle but powerful message: public opinion (or at least, the opinion of its readers) on this particular issue matters.

And who knows? Maybe if you treat the public as Citizens, and provide them with the information they need to make good decisions on important issues, they will reciprocate by making those decisions. Daily Star people (especially editorial page people); are you reading this?!?!?


Anonymous said...


The debate on whether to sell the national gold reserve or not has been going on for years now. Those against contend that this may devalue the Lebanese pound. Something late PM Hariri struggled to prevent.

But my fear has always been that the income from the selling of the gold will find its way into private pockets, like other public funds have, in this corrupt state of ours.

What guarantees do we have?

Solomon2 said...

It's a lot of gold for a little country. Let it rest for a while until the country is more stable.

Anonymous said...

It tells me that the governments of the 60's and 70's was far more efficient and responsible than the current ones.

Anonymous said...

"The Lebanese gold simply does nothing."

That's not true. It improves our solvency and allows us to get lower interest rates on the debt.

Raja said...

vox, as for your first comment, you may be right. In fact, I was about to write the exact same comment.

However, the governments of 60's and 70's didn't have to rebuild a destroyed country and capital city.

Another thought that came to my mind and stopped me from including that comment was: maybe if the Lebanese governments of those years had spent that money wisely, things could have turned out better. (i.e. welfare, education, security)

I know, I know... a bit naive, but nonetheless real enough to make me think twice.

I guess fiscal responsibility is one thing, and effective governance is another. Don't you agree?

Anonymous said...

"However, the governments of 60's and 70's didn't have to rebuild a destroyed country and capital city. "
it is not the government that paid for reconstructing downtown but a private society.

moreover, contraly to what says vox, the gold doesnt have any real impact, such remark would make the international currency markets laught to hear that our gold reserve lower our interest rating, we can just look the rating of our latest eurobond issued when today the price of the ounce of gold is high.

instead of just focusing on the gold which is not a real problem, we should focuse on the problem of our monetary policy that is prooved to be a failure. The nominal/real interest gaps are so high, the Lebanese Pound value is not the real one , they have bunkerised our currency compared to foreign currencies (since hariri arrival in 1992) that today our economy cannot handle for more such tension. This is the tension with the corruption that is explaining the size of our debt (182% of the GDP) and make an economical crisis being able to burst at any time.
the parameters that save us for the moment is the speculation on real estate but real estate prices are also subject to business cycles

Anonymous said...

The problem of whether to hold Gold or not to hold Gold is an issue that is faced by each and every central bank in the world. Believe it or not their isn't a single clear cut answer to which option is best.
What is clear is that Gold does NOT play any longer the same role that it did prior to its demonitization in 1972. That is when the US declared that the price of Gold is no longer going to be defended by it but the price is to become determined by the market forces just like any other commodity. As of 1972 the price of Gold skyrocketed from its artificially low price for almost thirty years; $35 per oz. That is one reason why I doubt whether much of the BDL stock was aquired in the 70's. I am sure that most of the stock was aquired when the price was fixed.
Since the 70's most major central banks have sold a lot of their reserves and so did the IMF which used the proceeds to help the group of the poorest countries in the world. Inspite of all the sales by central banks they still hold over 30,000 tons which is around 20% of the stock in the world. So you see Lebanon is not the only country that holds Gold.
It is still used by all countries as part of their reserves. If the BDL did not hold Gold then it would have to hold an equivalent amount of hard currencies in order for its Balance sheet to balance.
Why hold Gold? Because it is still viewed by many as the best hedge against inflation and because it does inspire confidence in the institution that holds it. The major argument against holding Gold is that an alternative currency, say US dollars, could generate some income. But as we all well know, the yield on US T bills has been under 2% per annum for years while thye price of Gold has risen by over 50% in the last year or so. (The BDL is one of the few institutions in the world that uses the current market value of its Gold holdings on its balance sheet and thus they have benefited a lot from the increase in the market price of Gold). It is also important to note that Gold reserves in the BDL balance sheet form less than 20% of the total assets of the bank. Most of the other 80% is foreign assets. If the Gold is sold the receipts cannot and will not be used to pay back the national debt since the BDL assets do not belong to the government. The real purpose of the assets; Gold and otherwise; is to promote economic growth by maintaining a healthy economic environment i.e. follow an apropriate monetery policy that will keep inflation undre control, encourage investment and maintain relative foreign exchange stability.
If I were to offer my "advice" I would encourage the adoption of a policy that would sell a large portion of the Gold reserves , say half of them, over an extended period of time, say ten years.

Anonymous said...

My advice is to sell the gold asap, with about 10% commission for the three rou'asah, 2 % for each of the ministers, the rest should be paid to cover the debt interrest for a year or so, then we have a whole year of fun till we have to worry about the debt again :-)

My point is, like bashir's, until we know that the people in chanrge are at least relatively, remotely,possibly clean let's not rush into converting the gold to a more easily stealable material :-)

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