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Central Bank Gold Sales, 2007-08

While Spain and Switzerland continue to sell gold, Russia and smaller banks are looking to buy...

WHAT LOOK TO BE persistently
high gold sales by the signatories of the Central Bank Gold Agreement
in Sept. '07 – the first month of the fourth year of their five-year
agreement – it's worth contemplating what lies ahead for central bank
gold sales from here.

   In the week ending 26th October 2007, the decrease of €126 million
in gold and gold receivables reported by the European Central Bank
reflected sales of gold by two Eurosystem central banks – consistent
with the Central Bank Gold Agreement of 27th September 2004 – of 7.25
tonnes approximately.

It would seem that the Swiss are the larger of the two sellers,
with either the French or the European Central Bank as the other
seller. If the past is indicative of the present, the Swiss will
continue selling at this pace until they have completed their
pre-announced sale of 250 tonnes in the first quarter of next year.

Each week of these high sales gives us more certainty on that. Indeed, data compiled here at Gold Forecaster paints a dramatic picture of central bank gold sales going forward into the new year.

  • The tonnage remaining for sale is now down to just over 650
    tonnes all told, and we have two more years of sales still remaining;
  • More announcements can be made, but we only expect unplanned sales from Spain to the extent of 100 tonnes;
  • We
    know that the remaining Swiss sales are around 6 to 8 tonnes per week,
    with only around 100 tonnes remaining. So we guesstimate around 17
    weeks or less before these sales are exhausted.

If the Spanish repeat their past performance of the 2006-2007 CBGA
year, their sales will be out of the way by May 2008, leaving 550
tonnes for the duration of the agreement. Portugal did not sell gold
last year so may not sell any more, taking 100 tonnes out of this 550
tonnes leaving 450 tonnes for the duration.

The balance of the announced sellers have set a pattern of steady sales
spread over the years. With present demand failing to dent the rise of
the Gold Price, it seems likely that such a drop in sales will add impetus to future Gold Price rises.

The second dramatic factor we've uncovered is that in the final
quarter of the last CBGA year (Sept. 2006 to Sept. 2007) Russia began
its long awaited purchases of gold for its reserves.

As we forecast, these took the form of buying local gold-mining
production before it hit the open market. President Putin made it clear
to the Russian Central Bank that he wanted gold reserves up to 10% of
reserves, but he had not been obeyed to date. The start of these gold
purchases signals that this policy may have begun.

If so, Russian production at just over 200 tonnes to 250 tonnes
per year will be the initial target of the buying. This is important
because at a time when new gold supplies to the market are set to fall
after next year, such buying can be taken off the above sales. So
whether it is 88 tonnes or the entire 200 tonnes and more that Russia
says it needs, central bank gold sales would net out – overall – at
between 0 amd 200 tonnes in the next two years.

There are now great pressures on central banks to stop selling
gold and to follow the example of Russia. The prospect of currency
crises is growing by the day, spreading fear of the value that
currencies will have goiong forward. In the past such pressures have
forced central banks to turn to Buying Gold.

As the latest example of such pressures, just take a look at Hong
Kong. With the US Dollar waning fast, and currency pressures mounting
across the globe, investors have never needed safe-havens for their
wealth more than today.

At the front safe havens sit Gold Bullion Investment
and silver. Many feel that the pressure may be short-term, but we
believe it is systemic and growing worse by the day. As the
hemorrhaging of US Dollar's value continues, smaller central banks are
fighting to stop their currencies from rising – so as to protect the
competitiveness of their own currencies.

If this pressure persists these banks will be forced to take more
regulatory measures, such as imposing controls on inflows. The latest
reported incident of these is in Hong Kong.

Hong Kong's de-facto central bank stepped in four times last week
to defend the Hong Kong Dollar's peg to the US Dollar, injecting about
HK$6.2 billion (some US$800 million) into the red-hot market, selling
the local Dollar to buy the ailing greenback. As the US Dollar weakens,
so this intervention will continue.

Under Hong Kong's currency board system, the HK Dollar is pegged
at 7.80 to the US Dollar, but it is allowed to trade between 7.75 and
7.85. When the Hong Kong Dollar reaches the limits of its trading band,
the monetary authorities can be expected to intervene. But with the cut
in US interest rates adding more upward pressure, Honk Kong will react
by releasing more local currency, so importing inflation and allowing
more "hot money" into their own local system.

Short-term investments can leave as quickly as they arrive,
contracting the money supply when they leave and leaving instability
and eventual loss of control over the money supply behind them should
such action reach extremes. Inflow Capital Controls are another way of
coping with this problem...or perhaps a strong revaluation of the
currency plus a departure from the US Dollar peg.

The HK Dollar has been rising against the US Dollar as investors
pour money into the soaring Hong Kong stock market. The HKD hovered
near 7.75 to the USD all morning last Wednesday, before the Hong Kong
Monetary Authority began buying greenbacks to keep the local currency
within the trading range. Last week's moves follow two interventions by
the HK Monetary Authority last week, its first such actions in more
than two years, causing speculation that Hong Kong might widen the peg,
or drop it all together.

The Hong Kong government is "totally committed" to the linked
exchange rate mechanism. This is usually a prelude to actions to fully
control the situation along the line we mention here. We can only
conclude that the tumbling US Dollar is encouraging dramatic and
sustained intervention from smaller central banks in the currency

In their reserves, there will probably be no new announcements of central bank gold sales. Rather, those banks Buying Gold could soon overtake those still left selling it.

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

See full archive of Julian Phillips.

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