Will More Central Bank Gold Sales Be Announced?

Source:

"...If (investment demand) continues or even to grow, we fully expect the gold price to continue rising and at times vigorously, with ‘spikes’, falling back thereafter."(6/17/07)

Since our inception we have run this table on Central Bank gold sales under the Central Bank Gold Agreement.

On the 26th September 1999, the signatories to the “Washington Agreement” made this statement: - In the interest of clarifying their intentions with respect to their gold holdings, the above institutions make the following statement:

- Gold will remain an important element of global monetary reserves.

- The above institutions will not enter the market as sellers, with the exception of already decided sales.

- The gold sales already decided will be achieved through a concerted program of sales over the next five years. Annual sales will not exceed approximately 400 tonnes and total sales over this period will not exceed 2,000 tonnes.

- The signatories to this agreement have agreed not to expand their gold leasing and their use of gold futures and options over this period. This agreement will be reviewed after five years.

We have always differentiated between the sales decided upon earlier and sales about which no announcement was made. We have done this for a reason, despite the fact that while the first “Washington Agreement” stated from the outset, that they would only sell gold from sales “already decided”, the second Central Bank Gold Agreement stated differently, that gold would be sold from “sales already decided and to be decided thereafter”.

The difference is huge it would seem, because in the first agreement the market knew for certain what would be sold, thus removing all uncertainty from the prospective European Central Bank sales [in addition to the tacit agreement by the Fed, the Bank of Japan and the B.I.S. that they would not sell gold either]. This transparency was a confidence builder for gold, as the gold price demonstrated thereafter.

Consequently, the gold market appreciated that the 400 tonne sales per annum could easily be absorbed, without damaging the price. But the addition of the phrase “and to be decided” in the second agreement seemingly destroyed that transparency. Nevertheless, the market accepted that 500 tonnes per annum could also easily be absorbed by the market per annum and the price continued to prosper and would cap any remaining uncertainty.

The history of the second agreement has clearly defined that the “ceiling” of 500 tonnes was only that. Any shortfall on that amount was simply because the signatories decided to not sell up to that amount for whatever reasons. Signatories like Germany have to date, chosen not to exercise their “option” to sell up to a total of 500 tonnes over the period of the Agreement.

France came in as a potential seller of up to 600 tonnes over the life of the Agreement, but an unwilling one prompted by pressure from the now President of France. The sales were announced at the beginning of the Agreement.

It became clear that the “sales to be decided upon” have been, to date, restricted to announcements made at the start of the Agreement with only Belgium and Spain making no announcement whatsoever.

- Spain has been selling under pressure to do something about its Trade deficit, despite the Finance Minister’s statement.With the signatories under-selling last year and heading that way this year too, additional sales from Spain are possible still.

- Germany annually announces whether or not it will sell any gold, retaining its option, but indicating it is not an attractive one, with statements like “gold is a useful counter to the $”, indicating that they are unlikely to sell in the future.

- Belgium has sold nothing in this and the last CBGA year, so indicating that it is unlikely to sell again in this agreement, but we cannot be certain of that.

So far the signatories of the C.B.G.A. have acted responsibly and with regard to the orderliness of the market by making announcements ahead of sales at the beginning of the agreement.This was vital to prevent the fear of the prospect of unlimited, unexpected, Central Bank sales, as was the case prior to the “Washington Agreement’s” announcement. To suddenly announce sales then proceed with selling in the middle of the agreement could destabilize the market despite the “ceiling” limitations.(CHART 2)

A forced seller like Spain has the freedom to sell gold because of outside pressures, but where there is no outside pressure, the signatories have made clear in advance what they were going to do via public announcements. For instance Germany has kept its “option” to sell 600 tonnes, open. Until the announcement by Switzerland today no further sales were going to take place.

The New Sales from Switzerland

Here is the Official press release announcing a further 250 tonne sale of gold by Switzerland:

The Swiss National Bank is adjusting the composition of its currency reserves. Before the end of September 2009 it will sell 250 tonnes of gold and increase its foreign exchange reserves by a corresponding amount. The overall level of currency reserves will remain unchanged.

The gold sales fall within the bounds set by the second Gold Agreement of 8 March 2004, in which the central banks of the Eurosystem, plus the Sveriges Riksbank and the Swiss National Bank, agreed to limit their gold sales over a period of five years, beginning on 28 September 2004. The Gold Agreement specifies that annual sales by all signatories may not exceed 500 tonnes and that the total sales volume over this period shall not amount to more than 2,500 tonnes. For the gold sales it was planning, the SNB was allocated a quota not claimed by other central banks that were party to the agreement of 2004. The SNB has chosen an approach for its gold sales that will avoid market unrest, with regular sales transactions.

The Swiss National Bank holds currency reserves in the form of foreign currency and gold, thereby ensuring that it has room for maneuver in its monetary policy at all times. As a result of the sharp rise in the price of gold, the proportion of the currency reserves held as gold has increased by about a quarter since mid 2005, from 33% to the current level of 42%. The purpose of the SNB's gold sales is to rebalance the composition of currency reserves with respect to its monetary policy requirements. Moreover, by reducing its gold reserves and increasing its foreign exchange reserves, the overall risk on SNB assets will decline. Once the sales have been completed, the Swiss National Bank's gold holdings will amount to some 1,040 tonnes.


The wording of this statement is extremely revealing and opens a door we could not look into clearly until now. The use of ‘options’ to sell, given to the signatories was mentioned by Germany, but we could not define this for sure. With this information we can now see what sales can be expected and from whom. Take a look at the Table above [in this week’s issue] and you can see that a total of 1480 tonnes of gold sales was announced for this agreement. But remember that Germany had the option to sell 500 tonnes, which was not included in the total. Now add to this the 250 tonnes of sales from Switzerland [on top of the 130 tonnes of sales left over from the “Washington Agreement years] to be completed by 26 September 2009] and you get 2230 tonnes. But Spain has sold 108 tonnes this year already, taking the total to 2,338. Deduct this from the total and you get another 162 tonnes left to come from an unannounced or announced seller. We expect this to come from Spain.

We would like to point out that this was not claimed by Switzerland from another Central Bank but was part of the original options schedule granted to each Central Bank, whereby Switzerland gained the option to sell this amount, an option it is now taking up.

If Germany retains it present views then we must deduct that amount [500 tonnes] from the total possible sales of 2500 tonnes. If Portugal and Austria keep away from the market as they are doing at the moment then they will not sell their ‘option’ amount, which makes another 160 tonnes approximately, to be taken off the market, meaning that the probable total remaining to be sold is in the order of 700 tonnes, to be sold over the next 28 months [average 6.25 tonnes a week]. If current patterns are to be followed, the actual amounts to be sold will coincide with the seasonal patterns, so as to cause the least downward pressure on the price. So expect maximum Central Bank sales between March and May and between September and December].

At least now we have a clear picture of what lies ahead by way of Central Bank sales.

How Will Switzerland Sell?

Switzerland set a pattern of selling in the “Washington Agreement” and in the early part of the C.B.G. Agreement of steadily an uninterruptedly selling a nearly fixed amount a week. So we would expect them to do the same, particularly in the light of their statement. If they decide to begin selling now then expect sales of between 2 and 2.5 tonnes sales a week until the end of the Agreement. Of course the amount they sell weekly is determined by when they start.

And the Effect on the Gold Price?

With supply remaining at near present levels plus Central Bank sales as above, de-hedging continuing at the present pace [we estimate], Indian physical buying rising steadily, alongside scrap remaining steady [we do not believe that scrap sales will rise with the price, but with gold price ‘spikes’], the gold price will steadily rise. Now add investment demand, the key to the gold price. If that continues or even to grow, we fully expect the gold price to continue rising and at times vigorously, with ‘spikes’, falling back thereafter.

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