Gold: The End of Central Bank Sales
Gold has done just what it should for central banks looking to "balance" the US Dollar...
WE ARE NOW VERY CLOSE to the end of the fourth out of five years of the second Central Bank Gold Agreement, writes Julian Phillips of the GoldForecaster.com, an agreement in which a 'ceiling' was placed on the sales of gold by the signatories at 500 tonnes per year.
With barely one week to go, France, Portugal, Switzerland, Austria and Sweden appear to be the only nations with significant announced sales still uncompleted.
Of these it appears that:
- France has not been selling for the last couple of months. It is possible that the Banque de France may have been given the OK for that by President Sarkozy. Did he go as far as to OK the halting of sales? It looks like it at the moment.
- Switzerland has almost completed its 150 tonne sales program. It will certainly be complete by the end of 2008.
- Portugal has not been seen in the market for some years now.
- Austria has not sold for the last year.
- Sweden is a slow seller but barely noticed by the market. It looks as though it will sell its remaining 16 tonnes.
- Spain is the unknown seller as it has never announced sales but suddenly comes out of nowhere, dumping a chunk on the market and telling everyone later.
- We are led to believe that the European Central Bank (ECB) has completed its selling program and may not be seen again selling gold.
So who's left? Nobody!
The turmoil in the currency markets is as much a Dollar reaction, after it strengthened, as any investor selling. Certainly the fundamentals for Gold have not changed one iota and the selling has been almost exclusive to short-term traders. They are likely to cover at some stage to reap their profits.
Nevertheless, the prime purpose of Gold in a central bank's portfolio – to quote Axel Weber, president of the German Bundesbank – is to "counter the swings of the Dollar", a task it has admirably done in the last few months and years.
Gold is likely to continue to do so, giving a degree of stability to these gold and foreign exchange that they would not have achieved otherwise. This period has been a salutary one for central bankers as it has reaffirmed the need to retain gold in their portfolios and not to blindly trust cash flow from investments to the exclusion of gold.
While the central bank sellers of gold followed another agenda regarding sales of gold, it was stated that income-bearing securities were preferred to gold, hence the sales. But the real reason we believe was to reinforce confidence in the new European currency created in 1999, the start of the first gold sales agreement by the European banks.
Previous gold sales by the United States and the International Monetary Fund (IMF) ostensibly attempted to achieve the same thing – confidence in paper money – but such a policy required a stable currency both in price stability and exchange-rate stability.
The last two decades of last century achieved that, but it became clear early in this century that such faith in the Dollar was misplaced. The Euro was met with great success partly because of this and partly because of its market acceptance. It is not out of the woods yet, however, as internal national economies baulk at the uneven yoke of one currency fits all.
The view within the Eurozone and within individual national reserve management, therefore, was that the gold portion of those reserves beautifully balanced the Dollar portion – just as it has been doing. This has been emphasized in the marketplace, not only for Gold but also for silver, which have both moved in the opposite direction to the Dollar's broad trade-weighted forex value, almost precisely.
The case for central banks retaining gold in their reserves has been definitively made. So while we do believe that there will be another Agreement by the signatories of the Central Bank Gold Agreement – due in Sept. 2009 after the fifth and final year of the current CBGA – its sole purpose will be to reassure the market that there will continue to be a "ceiling" on the amounts of gold to be sold in future years, and that will NOT mean a promise of sales.
This reassures the market place while letting the banks keep their options open. And should Congress agree to the sale of IMF gold of 400 tonnes, then these may well be the last sales of gold by such an institution ever again.
If we are correct, then we are at the point where central bank gold sales are almost a thing of the past.