Gold News

CBGA: Any Gold Sales Left?

The Central Bank Gold Agreement is now in its final year. How will it impact Gold Prices...?

RIGHT FROM 1980 through to 1999, the gold market had the possibility of enormous central bank gold sales hanging over it, writes Julian Phillips of the

Central banks did nothing to remove this impression but led the market to believe that it was likely. Their purpose was to ensure gold did not challenge the paper money markets.

In 1971, President Nixon had cut the link between Gold and money, removing the ability of foreign US Dollar holders to change their dollars into Bullion. This left the Dollar and all other currencies without any backing except the promise from central banks to change paper dollars into more paper dollars.

This would not have worked nearly so well had the US not had the power to ensure that the oil market was bound to use only its dollars as payment for oil. This entrenched the Dollar as the global world currency for the world ran on oil. The process was assisted by the policy of central banks leasing gold to gold mining companies. They then sold it to the gold market as far forward as they could to maximize the proceeds in a falling market. This accelerated the supply of gold to the market and saturated it.

CBGA: Credit Crunch Caps Gold Sales

Will this happen again? No, there is not a chance of this happening now, as the last 18 months of systemic failures in the credit markets have cast doubts upon the monetary system to weather the storms it faces. Gold, on the other hand, has a very long history of weathering such storms, both for private individuals as for national governments.

While central banks did sell gold, the quantities were not large enough to diminish its role as an important reserve asset, a point emphasized in the 1999 “Washington Agreement” (otherwise known as the Central Bank Gold Agreement or CBGA) wherein European central banks agreed to limit their sales to 400 tonnes a year for five years. The scheme was renewed in 2004.

The CBGA reassured the gold market that it would be threatened no more by unlimited sales from central banks as the Japanese and US central banks gave their tacit support to the agreement.

The next generations of money managers have never thought of gold as money and still don’t to this day. From 1980 until 1999, gold fell slowly from $850 down to $275, sidelining as money. Once central banks promised to limit sales, the gold price turned around and has steadily risen since then until now. But from now on, will we see vast amounts of central bank gold swamp the market or will they see the value of gold in their reserves and keep a firm grip on it?

The second central bank gold selling agreement (CBGA) was made for the next five years in 2004, officially called the “Central Bank Gold Agreement”. And now we have begun the final year of that CBGA agreement, the amount of gold that each bank announced it would sell has almost run out.

Of course they have the right under the agreement to announce more sales in the future, or to announce their sales after the event. However, the agreement had as a prime objective to keep central bank sales transparent, so as not to alarm the market. While they still don’t want gold to compete with paper money, they want gold to be an effective reserve asset. They have kept to this over the last 9 years (except for Belgium and Spain). A closer look at what’s left to sell presents a remarkable picture, one that has not been factored into the Gold Price, not yet.

If all the announced sales were made the final year of the Agreement, the market would see sales of 320 tonnes from the signatories, nearly 200 tonnes lower than the ‘ceiling’ of 500 tonnes permitted under the Agreement. But so far, the sales have been taking place at the rate of 2.5 tonnes a week.

At that rate, Central Bank selling of gold will only reach 130 tonnes in this, the final year of the Central Bank Gold Agreement. But let’s look even closer at who are the likely and unlikely sellers despite the announcements they made.

  • Austria stopped selling in the third year of the Agreement, so their residue of 52.6 tonnes of announced sales is unlikely to come to the market;
  • Portugal stopped selling in the third year of the agreement, so the residue of their announced sales of 100.3 tonnes is unlikely to come to the market;
  • Switzerland has stated it will no longer be a seller having completed its sales;
  • Without a further announcement, the European Central Bank (ECB) has completed its sales of 235 tonnes;
  • Germany has stated it is not a seller of gold, appreciating that it is a counter to the swings in the Dollar;
  • Spain and Belgium never made any announcements as to what they would sell, but we note that they sold none in the last year (fourth) of the agreement;
  • The Central Bank of Italy has said it has no plans to sell gold, but the Finance Ministry of Italy is now debating the matter. We think this is political rhetoric at the moment and do not expect any sales to be forthcoming;
  • Previous announces leave Sweden still to sell 13 tonnes;
  • The Netherlands still has 9 tonnes booked for sale;
  • Finally, France had 121.1 tonnes still to sell at the beginning of this final year of the agreement.

So the total of active sellers among the signatories is only 143.1 tonnes of which 25 tonnes has been reported as sold since the 26th of September 2008.

This is in line with the present selling rate of the gold. The market expected to see 500 tonnes this year, up until the 26th of September 2009, so expect it to be disappointed to the extent of 350 tonnes.

It is very clear now that Central Bank gold sales, excepting any further announcements of sales, will not be a significant factor in the gold market until the 26th of September 2009. The only other possible source of gold sales will be the 400 tonnes the International Monetary Funds wants to sell. But this can only happen if the US Congress agrees to the sale. Since it was discussed earlier this year, there has been only silence on the matter.

If it were given the okay, the way of selling IMF gold could take many forms, including auctions and an outright sale to selected buyers (as happened in previous IMF sales), which would not affect the gold price, except that the buyer could well be another Asian central bank who could take it all. This would be positive for the gold market.

CBGA: Italy to Sell Gold?

Italy, it seems, has not escaped the political interference (imagine if politicians ran central banks!) that has affected gold sales in Germany, France and Switzerland. The Italian parliament will consider a plan to use the Bank of Italy gold reserves to lift the country's economy, according to the parliament's finance committee chairman.

These currently stand at 2,451.8 tonnes or 67% of its reserves. (Gold forms 77.3% of US reserves in contrast – but the US can print cash.) It is reported that Finance Minister Giulio Tremonti is considering a plan to cut Italy's huge debt and finance infrastructure projects. This amounts to $65 billion of value if the entire amount were sold. Previous attempts by European Union governments to use proceeds from central-bank reserve sales to support political goals have been met with resistance. We have little doubt that the same will happen with this plan.

Of course, if Italy wanted to sell its gold for the purpose described in the announcement, they would do best to sell it directly to China at one market related price. But the present reality is that this is a political ploy to gauge public opinion prior to a commitment being made in either case.

After all, $65 billion is just over the amount to bailout a couple of major banks, but not enough to resuscitate an ailing Italian economy. Once spent, the reserves are gone and the nation would have no credible backing to its economy going forward.

So we doubt at this stage whether this ‘plan’ will come to fruition.

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.

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