Gold: a trading period ends, another begins

The boom trading days for equities are over, but not for gold. Money can still be made in bank shares, but only by those who have an extremely strong grasp of gold bullion trading and of the personalities running the banks.

Gold was excluded recently for practical purposes from our Central Bank reserves but is now staging a comeback under the successful influence of the European Central Bank.

The present gold position of the Central Bank is by no means what it was 30 years ago. One has only to consult the old Central Bank balance sheets. We have never had to regret our gold purchases. Anybody in this country seeking to trade in gold and the dollar must study our Central Bank's history and learn from its triumphs and failures.

There was a time when our Central Bank lost €600 million in one day in the mid-1980s on trading the dollar. It was only a correction of our external reserves magnitude with a sharp revaluation of its gold bullion component that saved us all from utter humiliation. The sudden dollar devaluation which caused the catastrophe could easily have been foreseen as it had been published in The Economist.

A famous caricature had appeared of a funnily dressed 'Uncle Sam' representing the dollar. It was entitled 'Uncle Sam overdoes it'. That is, an overvalued dollar was due for a downsizing. The economist behind these movements of the dollar which cost us so dearly in the mid-1980s was Martin Feldstein. At the time, Malta could count itself lucky that its Central Bank was still so heavily invested in gold.

Feldstein was President Ronald Reagan's chairman of the Council of Economic Advisors and is now a member of President Barack Obama's Economic Recovery Advisory Board.

He is unambiguous in his outlook, saying: "The unprecedented explosion of the US fiscal deficit raises the spectre of a high future inflation. According to the Congressional Budget Office, the president's budget implies a fiscal deficit of 13 per cent in 2010. Even with a strong economic recovery, the ratio of debt to GDP would double to 80 per cent in the next 10 years." Bloomberg referred expressly to his Financial Times article.

Malta is not immune to the libertarian dogma that led the Federal Reserve astray. Has the time come to hedge investment portfolios with a sliver of gold, especially in bullion form? Henry Kaufman, the famous 'Dr Gloom', has been proved right more than once. Do his words in the FT this week ring a bell for the Maltese?

"The Fed failed to grasp early on the significance of financial innovations that eased the creation of new credit. Perhaps the most far-reaching of these was the securitisation of hard-to-trade assets. This created the illusion that credit risk could be reduced if instruments became marketable."

Are there in Malta any hard-to-trade assets? If there are such assets they are certainly not office accommodation built expressly for the international client.

Mr Azzopardi Vella, economic consultant with DBR Investments Ltd, has promoted the Malta Development Fund and advised S & P.

johnazzopardivella@hotmail.com