The New CBGA: Neutral for the Price of Gold?


". . .based on recent actions, signatories to the CBGA do not seem anxious to sell their gold. . ."

On August 7, the European Central Bank (ECB) and 18 other central banks signed an extension of the 5-year Central Bank Gold Agreement (CBGA). The current CBGA caps sales at 500 tons a year and expires on September 26. The new CBGA extends the agreement for another 5 years—through 2014—with a ceiling of 400 tons per year.

Observers suggest that the agreement is positive for the price of gold because it removes the risk that central banks in Europe will sell bullion indiscriminately, flood the market and drive the price down. However, based on recent actions, signatories to the CBGA do not seem anxious to sell their gold reserves too quickly. Actual gold sales by signatories to the CBGA in 2008 were 343 tons, well below the 500 ton per year ceiling.

According to GFMS, sales by all central banks were 39 tons for the first half of 2009, well below the 2008 pace. The largest sellers during this period were France and the ECB. Moreover, CBGA signatory Swiss National Bank has indicated they have no plans for any further gold sales in the foreseeable future. Switzerland, with gold holdings amounting to 1,040 metric tons, is the 7th-largest government holder of gold in the world.

The International Monetary Fund (IMF) is not a signatory to the agreement and is reportedly intending to sell 403 tons or 12% of its 3,217 tons of gold to central banks. The IMF is the third-largest official holder of gold in the world. Speculation is that nations with considerable U.S. dollar reserves, like China or Middle Eastern oil producers, might buy large portions of the proposed IMF gold sales.

The CBGA is more neutral than bullish for the price of gold because it represents a very high ceiling on annual gold sales relative to recent actual sales. The new agreement, combined with the large proposed sale of gold by the IMF, results in official gold sales levels that are roughly in line with the previous CBGA. Though not bullish for bullion, the agreement does provide a theoretical and unknowable floor for the price of gold because of the limit on sales.

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