RBA Justifies 1997 Gold Sale as Lawmaker Spars With Debelle
(Bloomberg) -- Australian opposition lawmaker Andrew Leigh sought to use gold hitting a record $2,000 an ounce to discomfit the central bank by ranking its 1997 decision to sell 167 tons of the precious metal at $400 an ounce “the worst market decision in Reserve Bank history.”
Leigh pointed out that the gold would be worth about $9 billion more now if the RBA had held onto it, during the central bank’s semi-annual testimony to parliament by video-conference on Friday.
“Do you acknowledge that in retrospect that was a lousy decision?” he asked Governor Philip Lowe, who ultimately defended the decision from a policy perspective.
Leigh, a professor of economics with a Harvard PhD, has used the RBA’s testimony in the past to grill Lowe over his failure to achieve the 2-3% inflation target and suggested the RBA has been too conservative in cutting interest rates.
He’s also sparred with RBA No. 2 Guy Debelle on some of the more obscure theories in academic economics.
Debelle, with a PhD from MIT under former Federal Reserve No. 2 Stanley Fischer, confirmed Leigh’s calculations. He pointed out that the RBA had used the proceeds to invest in treasuries, which had earned income in the ensuing 23 years, “unlike gold, which earns a zero rate of return.”
The sale also allowed the central bank to pay higher dividends to the government, allowing it to avoid borrowing at a rate of 5-6%, Debelle said.
“Maybe a more sensible decision would’ve been to turn around and take all those proceeds and invest them in Apple shares and we probably would’ve even got a higher rate of return,” he said. “Hindsight is always the greatest investment.”
Lowe pointed out the RBA isn’t an investment bank. It doesn’t hold a portfolio of assets to try and make the highest return, he said. It decided that converting the gold into foreign currency made sense because the bank needs it when it occasionally intervenes in the foreign-exchange market, the governor said.
“So from maximizing the value of our assets, if that was our objective, I accept your criticism,” he said. “But from a public policy perspective, it was the right decision.”
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