Gold News

Gold vs. Europe's central bankers

The new year of the Central Bank Gold Agreement just began. What does it hold for investors...?

MANY PROMINENT commentators on the Gold Market are giving the impression that Germany, and possibly Italy, will eventually be sellers of their gold reserves.

   If not in 2008, they think, the sales will come soon, even stating that the Bundesbank is "not opposed to such sales" but simply needs to agree the purpose for which the proceeds will be used.

Here at, we could not disagree more strongly!

Under the governorship of Axel Weber, the German government pressed the Bundesbank to sell some of its gold, but the central bank did not agree to the stated use of the proceeds. This response was correct, and they did make it clear that gold sales are not "verboten" as a matter of policy.

The key is not to confuse broad policy with investment decisions.
Instead, we believe that the Bundesbank remains strategically opposed to gold sales, as Axel Weber clarified when he stated:

"Gold is a useful counter to the swings of the Dollar."

He clearly agrees with the fact that gold is a fine counterweight to currencies in the reserves of a nation. More so, in fact, because since he made that statement, the Gold Price has performed wonderfully whereas the Dollar has performed abysmally, thus confirming the correctness of his investment policy.

   The Bundesbank and the government were not divided by the issue of what to do with any proceeds from gold sales. It was the independence of the Bundesbank regarding policy decisions that split them, a far more important issue. What to do with the proceeds is clearly spelt out in the rules governing the Bundesbank: they are to be retained by the bank in their reserves.

   The income on those sales is dispersible, but not the capital. As part of the nation's reserves, the capital is not there for research or social program or for any political whim. They are reserves of the German nation kept for a rainy day. (And that day is getting closer by the day, too...)

   Indeed, for the government to tell the Bundesbank what to do with the proceeds, they have first to enact a new law to do so, which must gain the majority agreement of the Reichstag, an unlikely possibility. This has to precede any gold sales imposed on the Bundesbank by the government.

   Meanwhile, the Bundesbank President can, if he so chooses to, sell Germany's gold any time he wishes and keep the proceeds in the central bank's vaults. But he has made it clear that he chooses not to do so, as is confirmed by the announcement in early October 2007 that the Bundesbank will sell no more than 8 tonnes in the next year of the Central Bank Gold Agreement, just enough to mint coins for commemorative purposes.

   This investment policy decision has been made by the Bundesbank without being influenced by government. We believe Weber will make the same announcement in 2008 covering 2009, too. Because to sell gold would be a bad decision, Axel Weber believes.

   Might Italy sell? The Banco d’Italia used simple uncomplicated words when last asked that question: "We have no plans to sell gold."

   Little there to confuse anyone, you might agree.

   Yes, the Italian Parliament did approve a plan allowing for the sale of gold to reduce the National Debt, but as the European Central Bank stated very strongly in response, it is they – the ECB – who would make that decision, not Italian politicians.

   And again, the transfer of assets from the central bank to the government probably would not be allowed under the existing Eurozone agreements.

   Looking at Sweden, the Rijksbank said it plans to sell up to a further 10 tonnes of gold by the end of September 2008, invesing the proceeds in foreign exchange reserves. Clearly the purpose here was simply a statement of confidence in currencies, however, and not a wise investment decision.

   This tonnage remains within the amount the Swedish central bank originally said it would sell. With 25.6 tonnes still to sell from that original announceent, we now know that it will sell up to 10 tonnes in the year to Sept. 2008 and a further 15 tonnes in the final year of the current CBGA agreement, ending Sept. 2009.

   As for Spain, the largest seller in 2006-07 with 165 tonnes, Spanish central bank governor Miguel Angel Fernandez Ordonez said that the Bank of Spain plans no more significant gold sales in 2007. The CGA-year just ended saw the bulk of its planned bullion disposals completed. The Banca d'Espana now have 281 tonnes left in their reserves, so they could possibly sell another 100 tonnes from here? If so, the total to sell rises to 785 tonnes in the next two years.

   We believe such a large quantity in fact means Spain will sell less than the total amount available to it, possibly far less. That enables us to figure a total of 785 tonnes of gold to be sold by the entire number of the signatories to the Central Bank Gold Agreement in the next two years, the last two years of the current CBGA.

   This would result in around 400 tonnes per annum, 100 tonnes less than the ceiling of 500 tonnes. Such a drop in the annual sales will place upward pressure on the Gold Price as private investment and Asian jewelry buying remain buoyant.

   The beginning of the CBGA's third year, commencing on the 27th Sept., could see the European Central Bank sell its own annual allotment over the first one or two months, but this should not cap the Gold Price at this current highpoint in the year's demand for gold.

   Asian purchases, particularly as the Hindu festival of Diwali draws near, would swamp any impact from European central bank sales. Switzerland, however, will sell vigorously as it has done of late. We cannot be sure until next week if this is happening now. Its sales to date, however, have signally failed to push prices lower.

   Could gold sales increase beyond the balance of announced sales? Well, the sellers who do so unannounced can add to this total and Spain is a likely candidate, perhaps dumping up to 100 tonnes of their remaining 281-tonne holdings? But an unwise policy like this, selling gold to pay off debts, would rebound on the Banca d'Espana's reputation. And because Belgium has not sold any gold since the first year of the agreement, we do not think Belgium will sell more.

   Apart from that, and in line with the intended transparency of the Central Bank Gold Agreement, the remaining signatories will make an announcement to sell well ahead of doing so. We do not exclude further announcements, in short.

   But if these announcements don't come, and sales stay at high levels now to reach the 500 tonne ceiling this CBGA year, there could be as little as 185 tonnes left to sell in the final year of the agreement, removing the last vestige of downwards pressure on the Gold Market just as the Central Bank Gold Agreement reaches its end.

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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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