Do the Swiss central bank gold sales mark the end of central bank gold sales?
A snippet from the latest weekly issue of GoldForecaster.com
SINCE THE GoldForecaster was first launched, we have studied central bank gold sales under the Central Bank Gold Agreement starting in 1999. We have always differentiated between the gold sales decided upon earlier and gold sales about which no announcement was made by the central banks – and for good reason.
Central bank gold sales since 1999
Despite the fact that while the first "Washington Agreement" of 1999 stated from the outset that the central banks would only sell gold from gold sales "already decided", the second Central Bank Gold Agreement (2004) stated differently. Gold would be sold as part of "sales already decided and to be decided."
The difference is huge it would seem, because in the first agreement the market knew for certain how much gold would be sold, thus removing all uncertainty from the prospective European Central Bank sales, in addition to the tacit agreement by the US Fed, the Bank of Japan, and the Bank for International Settlement (BIS) 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 agreed 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 Central Bank gold sales agreement seemingly destroyed that transparency.
Nevertheless, the gold market accepted that 500 tonnes per annum could also easily be absorbed, and the price continued to prosper.
The history of the second agreement has clearly shown that the "ceiling" of 500 tonnes was merely a limit, not a guaranteed quota. Any shortfall was simply because the signatories decided to not sell up to that amount for whatever reasons. Signatories like Germany, for instance, 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 the French central bank was unwilling gold seller prompted by pressure from the new president – and former finance minister – Nicholas Sarkozy. The gold sales were announced at the beginning of the Agreement.
Central bank gold sales: What's happening now
It has become clear that the "sales to be decided upon" have been, to date, restricted to announcements made at the start of the Agreement. Only the central banks of Belgium and Spain have made no announcement whatsoever of their pending gold sales.
Spain's central bank has now been selling gold under pressure to do something about the country's trade deficit, despite the finance minister's comments to the contrary. He claimed the Spanish central bank's gold sales were solely due to replacing gold with "more profitable" assets, such as bonds.
With the signatories to the central bank gold sales agreement under-shooting their gold sales ceiling last year –and heading the same way this year too – additional gold sales from Spain's central bank 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 via statements such as "Gold is a useful counter to the Dollar". The German central bank looks unlikely to enter into gold sales in the future.
Belgium has sold nothing in either this or the last year of the Central Bank Gold Agreement year, thus indicating that it is unlikely to sell gold again in this agreement. But we cannot be certain of the Belgian central bank's gold sales intentions.
So far the signatories of the Central Bank Gold Agreement have acted responsibly and with regard to the orderliness of the market. The central banks have made announcements ahead of their gold sales at the beginning of each agreement. This was vital to prevent market fears of unlimited and unexpected central bank gold sales, as was the case prior to the "Washington Agreement".
Central bank gold sales: Why set agreed ceilings?
To suddenly announce gold sales – and then proceed with gold selling in the middle of the agreement – could destabilize the gold market, despite the "ceiling" limitations set upon each of the central banks involved.
A forced gold seller like Spain has the freedom to sell gold because of outside pressures, in this case the Spanish trade deficit hitting 9.5% of GDP. But where economic pressures do not enter into the gold sales decision, the central bank signatories have made clear in advance – via public announcements – what they were going to do.
For instance Germany's central bank has kept its "option" on 600 tonnes of gold sales open. And until the announcement by Switzerland in May 2007 no further gold sales were going to take place.
The new sales from Switzerland's central bank – announcing gold sales of 250 tonnes –is extremely revealing. It opens a door we could not look into clearly until now.
The use of "options" to sell gold, given to the central bank signatories, was mentioned by Germany. But we could not define this for sure. With this new information from the Swiss central bank's gold sales announcement, we can now see what gold sales can be expected – and from whom.
The GoldForecaster.com has figured that a total of 1,480 tonnes of gold sales were announced for this current central-bank gold-sales agreement, running from 2004. But remember; 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 gold sales left over from the central bank "Washington Agreement" – to be completed by 26 September 2009 – and you get 2,230 tonnes.
Spain's central bank, however, has now completed gold sales of 108 tonnes this year already. Deduct this from the total and you get another 162 tonnes left to come from either an unannounced or announced central bank gold sales program.
Central bank gold sales: Options & quotas
We would like to point out that the central bank gold sales just announced by Switzerland were not claimed from another central bank's gold sales quota. They came as part of the original gold sales options schedule granted to each central bank, whereby Switzerland gained the option to sell this amount – a gold sales option the central bank is now taking up.
If Germany's central bank retains its present view on gold sales – and gold's use as a Dollar hedge – then we must deduct the Bundesbank's gold sales quota of 500 tonnes from the total possible gold sales of 2,500 tonnes. If Portugal and Austria keep away from gold sales as they are doing at the moment, then their central banks will not sell their "option" amount either. That makes another 160 tonnes of gold sales to be kept off the market, meaning that the probable total remaining to be sold is in the order of 700 tonnes over the next 28 months.
That would put central bank gold sales at an average 6.25 tonnes per week between now and Sept. 2009. If current patterns are followed, the actual amount of central bank gold sales will coincide with the seasonal patterns, so as to cause the least downward pressure on the price.
In short, expect maximum central bank sales between March and May and between September and December, right alongside the traditional boost to gold market prices from the Indian wedding season amongst other factors.
At least now we have a clearer picture of what lies ahead by way of central bank gold sales. But how will Switzerland sell?
Switzerland set a pattern for its central bank gold sales during the first "Washington Agreement" – and also during the early part of the second Central Bank Gold Agreement – by steadily selling a nearly fixed amount of gold each week. We would expect the new Swiss central bank gold sales to show a similar consistency, particularly in the light of their stated aims – reducing gold's weighting in Switzerland's foreign reserves portfolio to account for its price rise of the last two years.
If the Swiss central bank decides to begin its gold sales right away, then expect gold sales of between 2 and 2.5 tonnes sales per week until the end of the Agreement in fall 2009. Of course, the amount they sell weekly is determined by when they start.
And the affect on the gold price? With supply remaining at near present levels – plus central bank gold sales as shown above...de-hedging by gold miners continuing at the present pace...Indian physical buying rising steadily...while scrap sales remain steady – then the gold price will steadily rise.
Now add investment demand, the key to the gold price. If that continues or even grows further, we fully expect the gold price to continue rising, at times shooting higher in spikes and then falling back to the long-term uptrend thereafter.
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