Canada's gold reserve sell-off makes sense: experts

CALGARY -- Canada may be a global outlier when it comes to its sell-off of gold.

But to Ian Lee, a professor at Carleton University's Sprott School of Business, the decision marks the end of an era that doesn't fit into today's financial system.

See Full Article

"Why did they sell the gold? To convert it into cash, which is liquid," said Lee. "Bullion is not liquid. It sits down in the basement and collects dust."

The country's holdings in the precious metal peaked in 1965 at 1,023 tonnes or about 32.9 million ounces, according to the World Gold Council. But in recent years, gold has lost its lustre for the federal government, which on Thursday announced it was left with 77 ounces in official reserves -- less than a quarter the size of a gold bar.

Lee said countries previously measured their wealth by the amount of gold they had, and currencies were fixed to the price of gold. Those days are long gone.

Today the world relies on much more efficient floating exchange rates to balance the value of currencies, and wealth is measured in productivity, said Lee.

"The idea that that's the productive wealth of Canada, in the number of yellow bricks it owns, is just so preposterous."

With the United States abandoning the gold standard in 1933 and then fully severing ties between the dollar and gold in 1971, Lee says bullion no longer holds sway on global finances.

"That was it for gold," said Lee. "From that point on, gold became a member of an asset class, a heavily traded asset class, but it was no longer an instrument of monetary policy."

But those reasons haven't stopped governments around the world from holding vast quantities of gold, with the U.S. currently sitting on 261.5 million ounces, Germany with 108.7 million ounces, and China, Russia and India all actively adding to their already tens of millions of ounces in holdings.

Lee said gold bugs like Rand Paul and Ted Cruz, who fear the collapse of modern monetary policy, have prevented the U.S. government from selling off their reserves. Similar resistance, as well as tradition, has kept other countries also holding onto their reserves, he added.

Peter Schiff, head of Euro Pacific Capital, is another of those gold bugs. He said he believes Canada will likely regret the sell-off.

"I think it was a major mistake for the central bank to do that," Schiff said. "We're on the verge of a major, major meltdown of the dollar."

Like many gold aficionados, Schiff thinks the world could soon return to a gold standard and Canada will likely be forced to buy back the metal at higher prices.

"The irony is Canada is going to have to buy its gold back," said Schiff.

But Don Drummond, a former high-ranking bureaucrat at Finance Canada, said it hasn't made sense for Canada to hold gold for a long time.

He said he helped start the policy for Canada to gradually sell off its gold reserves after it was decided there were better ways to store wealth.

"It was just a realization that that's a lot of money tied up in something that was giving a terrible rate of return. And we didn't need it," said Drummond.

Drummond said that governments with foreign reserves in the trillions might find it difficult to diversify their holdings so they resort to gold at times, but Canada can easily diversify its US$81.5 billion in reserves with various foreign currencies.

A Finance Department said the sale was part of long-standing policy of diversifying its portfolio by selling physical commodities like gold in order to invest instead in assets that are more easily traded.



Advertisements

Latest Economic News

  • Airbnb drops lawsuit against NYC over new state law

    Economic CTV News
    NEW YORK -- Airbnb has agreed to drop a lawsuit against New York City over a new state law it said could have deterred hosts and impaired its revenues. The settlement was reached Friday. Source
  • France pledges $30 million for wartime heritage protection

    Economic CTV News
    ABU DHABI, United Arab Emirates -- France committed $30 million toward protecting cultural heritage sites during wartime on Saturday, a first step in the creation of an international fund aimed at preventing destruction like that carried out by Islamic State militants. Source
  • The best and worst ways to budget for the holidays

    Economic CBC News
    Presents. Parties. Travel. The holidays can drain our energy, and our bank accounts — even if we try our best to prevent it. We checked in with some of Canada's top personal finance experts for their best budget tips, but also their biggest blunders, because even the smartest money-handlers know holiday pressure can lead to poor decisions. Source
  • Angry Air Miles collectors demand back points they rushed to use on 'junk'

    Economic CBC News
    On Thursday, Air Miles cancelled its controversial expiry policy. But the move is only fuelling the fury for many collectors who used their points on stuff they didn't really want to beat the clock. Source
  • Death threats and abuse for woman leading Brexit court fight

    Economic CTV News
    LONDON -- Gina Miller is paying the price for going to court. The financial entrepreneur says she has received death threats and racial and sexual abuse since she won a High Court ruling forcing the British government to seek Parliamentary approval before leaving the European Union. Source
  • Air Miles rep: 'Options' may exist for panic redeemers

    Economic CTV News
    Air Miles Canada may have thought abandoning its unpopular expiration policy would calm the cardholder backlash from those who rushed to spend miles, but were frustrated by full flights, sold out merchandise, and long customer service delays. Source
  • Irving mill faces steep fines after being charged with polluting St. John River

    Economic CTV News
    SAINT JOHN, N.B. -- Irving Pulp and Paper is facing 15 counts of polluting the St. John River at its mill near the Reversing Falls tourist attraction. An Environment Canada spokesman says Irving has been charged under federal Fisheries Act provisions on the deposit of harmful substances into fish-bearing water. Source
  • Costco investigated over allegations pharmacy directors accepted kickbacks for certain brands

    Economic CBC News
    Costco is being investigated by Ontario's Ministry of Health for its compliance with the province's legislation on selling pharmaceutical and over-the-counter drugs. The health ministry investigation comes after the Ontario College of Pharmacists (OCP) announced it would hold disciplinary hearings for two Costco pharmacy directors because of allegations that they accepted Source
  • Costco to be investigated by government over compliance with drug-selling rules

    Economic CTV News
    TORONTO -- Costco is being investigated by Ontario's Ministry of Health for its compliance with the province's legislation on selling pharmaceutical and over-the-counter drugs. The health ministry investigation comes after the Ontario College of Pharmacists announced it would hold disciplinary hearings for two Costco pharmacy directors because of allegations that they accepted kickbacks for stocking certain brands. Source
  • United Airlines will pay US$2.4 million to settle with SEC

    Economic CTV News
    WASHINGTON -- The parent company of United Airlines will pay US$2.4 million to settle civil charges by securities regulators over flights that were started to help an official who oversaw one of the airline's hub airports. Source