Deep under the Bank of France's neoclassical headquarters in the heart of Paris is a huge vault known as "The Subterranean." Covering an area of one hectare, it contains more than 3,000 metric tons of gold, worth a staggering $36 billion at current market prices. That's roughly equivalent to 2% of France's gross domestic product, or more than half of this year's budget deficit.
Yet the hoard, which is a little over half of the central bank's total reserves, which includes euros and dollars, doesn't earn a single euro in interest and costs a fortune to guard around the clock. No wonder France's cash-strapped government is eager to get its hands on it. "[Is] it natural and normal that these reserves generate no revenue?" asked new Finance Minister Nicolas Sarkozy in an address to the French Parliament on Apr. 14.
That's becoming a familiar refrain across the Continent as politicians eye central bank gold stocks totaling 12,800 tons and worth $153 billion -- well above the 8,135 tons the U.S. Federal Reserve has stashed away in Fort Knox, Ky. European governments are eagerly proposing schemes to use proceeds from the sale of gold to fund everything from basic science research to paying down their ballooning national debts. French Prime Minister Jean-Pierre Raffarin proposed a gold-selling program in February to finance scientific research, under the slogan "today's gold for tomorrow's gold." German Chancellor Gerhard Schröder followed suit by suggesting that the Bundesbank consider selling some of its 3,440 tons. And Italian Finance Minister Giulio Tremonti is urging the Bank of Italy to reduce its 2,451-ton cache.
The new fervor over the ancient metal comes at a time when European governments are straining to finance new spending amid declining tax revenue. Germany and France, in particular, are already violating a European Union commitment to keep budget deficits below 3%. Philip Klapwijk, executive chairman of GFMS Ltd., a London precious-metal consultant, says the clamor for gold sales is a no-brainer: "It's a free source of revenue, and they don't have to tax anyone to get it."
European central bankers, such as Bank of France chief Christian Noyer, have been quick to argue against major gold sell-offs. They contend that gold stocks could offset any potential shortage in the future and also serve as a reserve of last resort in case of a major crisis. Meanwhile, advocates of gold sales say governments should be allowed to tap these reserves to give their budgets a quick fix, especially at a time when gold prices are hovering around $400, the highest in nearly a decade. The temptation has proved too strong for a number of European central banks, which have already run down their gold stocks. The Bank of the Netherlands has sold 210 tons since September, 1999, netting about $2 billion, and plans to off-load an additional 59 tons this year. The Dutch still have a 777-ton hoard. In the same period, the Bank of England has divested 345 tons, raising around $3.3 billion -- more than half the total it had in 1999. Most spectacularly, the Swiss National Bank, once one of the world's most dedicated gold bugs, has almost completed a program, started in May, 2000, to ditch 1,300 tons of gold, leaving only 1,462 tons. All told, it expects to raise nearly $16 billion and hand it over to the government. "We no longer need so much gold for monetary policy purposes," says a bank official.
Continental Europe's largest economies have been more reluctant to empty their gold vaults. The Bank of France hasn't dipped into its stash since 1969, when the franc was reeling in the wake of the 1968 riots. The Bundesbank has sold only 29 tons in recent years. And ultraconservative Bank of Italy hasn't parted with a single ounce since 1945. The Europeans built up the bulk of their massive gold reserves in the 1960s when most countries ran huge balance-of-payments surpluses with the U.S. The surplus dollars were converted into gold and used as reserves to support their national currencies on the foreign exchange markets. But with the launch of the euro, national central banks no longer need such large reserves. The European Central Bank has gold reserves totaling 766.9 tons, worth about $9.25 billion, which were supplied by its members' national central banks.
Traditionally, gold has been coveted as a safe harbor in times of distress and a hedge against inflation. But inflation is no longer the threat it once was. And while the price of gold has rallied in recent years, few market experts expect it to climb back to the $800-an-ounce level of 20 years ago. In a sign of the precious metal's decline as an investment, NM Rothschild & Sons, the British merchant bank, announced on Apr. 14 that it will pull out of the gold market, in which it had actively traded for 200 years. Says Chairman David de Rothschild: "We have concluded that this is no longer a core area of activity and have therefore decided to withdraw from the market."
More central bank selling could seal gold's fate as an economic relic of the Old World. If France, Germany, and Italy start selling, "it will be another historic step toward the demonetization of gold," says Andy Smith, a gold analyst at Mitsui Global Precious Metals in London. "The pillars of the market are crumbling."
Although Europe's fiercely independent central bankers don't like the idea, they are showing more flexibility than in the past when it comes to selling gold holdings. One reason for the change: Most of Europe's central banks are no longer earning their keep. Last year, most made little or no money and paid smaller dividends than expected to their governments. "They know the politicians were counting on that revenue," says Klapwijk.
In January, former Bundesbank President Ernst Welteke, who resigned under pressure on Apr. 16 for accepting favors from a bank, ceded some ground. He proposed selling as much as 600 tons of bullion over five years to raise cash for research and education. Bank of France is also showing a willingness to compromise. After initially rejecting Prime Minister Raffarin's plan, central bank head Noyer says he's willing to discuss it as long as the proceeds are kept on the central bank's books. Analysts say it is probably only a matter of time before Bank of Italy gives in.
A PROMISE OF PRUDENCE. To limit the negative impact of bullion sales on the price of gold, most European central banks signed an ECB-brokered agreement on Mar. 8 that limits total divestments to 500 tons a year over five years, starting in September, 2004. Under the accord, Germany would be allowed to sell 600 tons during the five-year period and France 500 tons. A similar pact in 1999 kept such sales from disrupting the market, and the price of gold has risen 44% since then. But the size of the divestments being considered this time around -- and the number of countries likely to sell -- are much bigger.
If the French, Germans, and Italians do start cashing in their ingots, it will likely have an impact. "The market will almost certainly go down," says Smith. Even so, governments are still likely to want to sell. Given the strain of Europe's budgetary needs and the difficulty of raising taxes, it seems certain that the day will come when the gold vaults of Europe's central banks are nearly empty.
By David Fairlamb in Frankfurt, with Carol Matlack in Paris and Maureen Kline in Milan