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Canada sells gold, keeps shift into euro reserves

by Randall Palmer, Reuters, 6 January 2002


OTTAWA, Jan 6 (Reuters) - Canada took advantage of the sizzling price of gold last month with the sale of one-eighth of its remaining gold reserves, part of a long-standing drive to get a bigger bang for its foreign reserve bucks.

A finance ministry official said the decision to sell was not explicitly tied to a specific gold price, but added: "When the price of gold is enjoying some lift, we may conduct more sales at that time."

Canada has been selling gold from foreign reserves since 1980, investing the proceeds in bonds and foreign-currency securities that yield a return which "far exceeds the return that the government gets on gold," the official said.

Finance ministry figures released on Monday showed that the government sold 83,399 ounces of gold in December, leaving its holdings at about 599,000 ounces. That is down from some 21 million ounces in 1980 before the gold sales started.

Gold prices climbed in December as investors, worried about the possibility of war in Iraq, looked for safe investments. The climb continued this month and gold traded at around $352 an ounce on Monday, close to its highest level in six years.

The finance ministry said it also maintained its practice of boosting its holdings of euro-denominated securities, bringing these to the equivalent of US$13.77 billion, or 42 percent of the total US$32.69 billion in foreign deposits and securities held by the government.

Just two years earlier, euros accounted for US$6.62 billion, only 23 percent of the total. The U.S. dollar share has gone down during that time to 55 percent from 75 percent. Small holdings in yen constitute most of the rest.

The government generally runs a "matched book" for its foreign exchange reserves -- issuing a global bond in U.S. dollars, for example, and investing the proceeds in U.S. bonds -- and consequently it does not incur foreign exchange risk.

The official said Canada's decision on which currency to use for foreign exchange reserves was driven by the difference between the cost of borrowing in that currency and the parallel return on investing it.

"We certainly feel that obviously the euro is one of the major reserve currencies of the world, along with U.S. dollars and yen, and that's why it's one of the three eligible currencies for us," the official said.

"But we don't change the proportion, say, of euro relative to U.S. dollar because we've changed our view on how the euro's going to perform relative to the U.S. dollar or on how we view the currency necessarily."

Copyright © 2003 Reuters News Service
Reprinted for Fair Use Only.

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