Global growth is reasonably strong and broad-based. Underlying inflation is low. Estimates of structural productivity growth in the United States remain high. The global economy has weathered the oil price shock and other recent shocks quite well. Most of the major emerging market economies look stronger than they have in some time. Overall volatility in output and inflation has moderated significantly in the United States and, to a lesser extent, in other economies as well. These favorable fundamentals are reflected in low risk premia of many forms - low credit spreads, low and quite stable inflation expectations, and low actual and implied volatility. Market participants appear to believe that future macroeconomic shocks will be more moderate, less frequent, and less damaging than past shocks have been. To say this another way, the price of insurance against a less benign world is now quite low. We face a number of significant challenges that threaten this positive outlook. I want to touch on the two that appear to me most important. The first is the growing imbalances at the center of the global economy. Fiscal policy in most of the major economies is on a path towards rising debt-to-GDP ratios; this trajectory gets dramatically worse as demographic changes reduce the ratio of workers to retirees. At the same time, external imbalances have reached unprecedented levels, most dramatically in the case of the U.S. current account deficit, which is on a path to exceed six percent of GDP. These imbalances – fiscal and external – cannot be sustained indefinitely.
I will not take the risk and predict the development of the gold price, but one thing is certain: it will remain volatile. Our possibilities to actively hedge the gold risk are restricted by the agreement of September 1999. In particular, we may conduct hedging transactions only in the amount of the sales quota allocated to us for the current year. We are therefore all the more convinced that our strategy of regular sales remains appropriate. The principles that have guided our operations for the past two years – namely fulfilment of our commitments under the central bank agreement, transparency in communication and situationadapted handling of day-to-day business – remain relevant. Management of the free assets The market value of the free asset portfolio – consisting of the as yet unsold portion of the 1,300 tonnes of gold and the proceeds from the already effected gold sales – amounted to Sfr 21 billion at the end of May. The free asset portfolio is managed separately from our other reserves, which will facilitate its transfer to the future beneficiaries once the legal framework has been put in place. As I mentioned earlier on, our possibilities of actively hedging the gold risk against an unfavourable development of the gold price are restricted by the agreement on gold sales of September 1999. However, we limited the risks of a weak US dollar that might reduce the value of our future sales by hedging 35% of the future proceeds in US dollars against the Swiss franc.