Bank of Portugal rejects gold reserve selloff

Despite the state of Emergency, the Bank of Portugal, which has one of the highest gold reserves in the world, has rejected any notion of selling part of it off to meet government spending.

This despite forecasts that the Government will suffer a significant increase in expenditure and an abrupt fall in revenues causing an increase in the public deficit.
However, as was the case in the Great Recession of 2008-2014 when the Portuguese government did not sell off gold reserves, it is unlikely to do so now says the online news source ECO.
Then, the sale of gold was tightly controlled by European regulations governing the quantity of gold any one state can sell onto the open market to stop the market being flooded and drive down the price of gold.
In fact, Governments and banks learnt the lesson of not selling off gold en masse after the market turbulence and inflation of the 1920s in Europe and Great Depression in the 1930s that followed and which, depending on which economics school is believed, led to Europe and the US abandoning a Gold Standard which may have contributed towards the Great Depression.
The Bank of Portugal has stated quite clearly that in the event of a recession or depression it has no intention of any selloff of reserves — for now.
Portugal has 382.5 tonnes of gold which is stored in various sites including the Carregado Complex, the Bank of England, the US Federal Reserve and the International Payments Bank, holding the 14th largest gold reserve in the world according to the International Monetary Fund.
As is usually the case in times of market and economic instability and crisis, gold has risen in price providing a healthy investment for those who bought when the price of gold was lower, although it is far form the peak it achieved in 2011 when a troy ounce of gold fetched US$1,900.
At the present moment, with the price of gold listed at US$1,600 per ounce (the currency in which it is quoted), Portugal’s national gold reserve is worth €20Bn or around 10% of annual GDP.
The question is if Portugal can sell some of its gold and who takes that decision. Until the end of 2019 there was that restrictive agreement between the central banks, including the European Central Bank (ECB) and the Bank of Portugal that limited the sale of gold but the agreement has now lapsed.
At the time, the ECB argued that the level of maturity in the gold market and the fact that not a single central bank had sold off gold in recent years (in fact. They have bought it) led to the conclusion that a formal agreement was unnecessary.
That means the Bank of Portugal is free from restrictions and can sell the gold. Today gold reserves are managed by the Bank of Portugal in accordance with a Law dated 31 January 2019 which does not include the provision of guarantees.
Portugal’s gold reserves belong to the Bank of Portugal and are independent of the government which means there is no obvious legal or institutional basis whereby gold could be sold off without the permission of the Bank of Portugal.
The reserves are to theoretically allow the central bank to intervene if necessary in the case of a run on the currency. But since Portugal has the euro and not the escudo, and therefore monetary policy is controlled by the ECB, the role that the bank would have had in a crisis had it had its own currency, makes no sense.
The current formal opinion of the European Union is that treaties foresee that is down to the European central banks to hold and manage reserves, including gold and are independent of any political power and do not have to follow instructions from the government.
Central banks are still forbidden by EU treaty to finance state deficits which would be infringed if gold was transferred to improve the state’s balance.
That said, the treaty does suggest that gold may be sold and the income from this operation could be distributed to the State through “the normal process of dividend distribution.”
“The Bank of Portugal has complete autonomy in decisions on how to manage its gold reserves, including distributing it in dividends paid to the Government,” says LSE economist Ricardo Reis.
“The real issue is whether it really make sense for Portugal to sell off some of its gold to deal with a temporary and transitory issue because once the gold is gone, it’s gone” he says.
“If Portugal does not have the financial conditions to manage the current crisis and it is a question of survival, then in theory some of the gold could be sold for now since the interest rates on Portuguese sovereign bonds in the secondary markets are at historically low levels because of the Euro Zone’s monetary policy” said the economist.
In any case, although Portugal has huge reserves of gold stashed away, its accumulated national debt is 10 times that value, so liquidating it to pay off debts wouldn’t solve any problem in the long term.
However, if the Euro currency collapses in the event of a long and severe Depression, then Portugal’s gold reserves might come in handy as a resource of last resort should she return to the escudo.