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Central Bank Gold

Gold-buying by China and Russia eclipses the Western banks' selling...

JUST AS THE new agreement by European central banks regarding gold sales was announced in August, only a tiny sale of 0.15 tonnes of gold was made during the week, with no sales the week after, writes Julian Phillips of GoldForecaster.com.

In this, currently the fifth and final year of the Central Bank Gold Agreement signed in September 2004 and expiring on the 26th of next  month, around 140 tonnes of gold were sold by the signatories. Of these, only 95.6 tonnes came from sellers who announced their intentions before the beginning of the agreement. Some 10.3 tonnes have yet to be identified, and the European Central Bank (ECB) sold an unannounced 35 tonnes as part of the final year's sales of around 140 tonnes.

This leaves a total of 215.5 tonnes of announced sales still to be sold. Of these announcements Portugal and Austria have not sold for the last two years. That leaves France selling at a trickle, if at all – some 50 tonnes?

At first glance, therefore, it appears extraordinary that a new agreement has been announced. The new 5 year Central Bank Gold Agreement sets a new, lower 'ceiling' of 400 tonnes of gold per annum. But given this year's trickle, where will the other 1,755 tonnes come from? None of the signatories have announced intentions to sell more gold.

Switzerland has now joined the ranks of Italy & Germany, making it clear they have no further plans to sell. Indeed, we can only see 50 tonnes of gold from France being sold in the 5 years of the new Agreement.

A glance at the pattern of selling shows that sales dropped off significantly as 2009 commenced. The last 6 months has seen only a trickle of sales dropping to the tiny levels we are now seeing and occasionally weeks when none was sold at all.

On top of that the number of signatories has increased to number in all, 19 central banks, including the European Central Bank, Belgium, Germany, Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Portugal, Slovenia, Slovakia, Malta, the Netherlands, Austria, Finland, Sweden and Switzerland. Spain and Belgium have sold before despite not announcing sales ahead of the event. But neither have sold for the last two years!

What extremely obvious conclusion can be drawn from this?

  • That this is an agreement to reassure the market that under no circumstances will gold sales be made from central banks exceeding 400 tonnes in any one year, an amount that can be absorbed by the market easily;
  • More positively the realities are that sales of a maximum in one year will be nearer to 50 tonnes;
  • Note the statement from the ECB included this comment: "The signatories recognize the intention of the International Monetary Fund to sell 403 tons of gold and noted that such sales can be accommodated within the above ceiling.

As to the 400 tonne 'ceiling' under the next agreement that comes into force on the 26th September 2009, we can now see that with a clearer perspective.

With the IMF hoping to sell that amount over time, or in one go, subject to members final decision later this year, room has been given to them to sell it in either way. If sold at one shot to other central banks, such as the Chinese or Russians the sale will fill that year's quota as other central bank signatories remain sidelined. If it is sold over the five years then it will be far less. Bear in mind this is a 'ceiling' not a floor, so allowing the other signatories to remain on the sidelines, not selling!

With the IMF still to make the final decision to sell, how and over what time, whatever is decided can now be accommodated. So don't expect new announcements from the signatories to the Agreement (of which the IMF is not one) to sell more gold. This agreement appears to be entirely for the benefit of the IMF.

So it is still possible that the Chinese, Russians, another central bank could buy the 403 tons of IMF gold in one go. We will have to wait until the meeting of the IMF until this is finalized. But all these central banks will continue to hold gold as a reserve asset and an important part of their reserves, because – as the statement reads – it provides protection, should the monetary system suffer extremely damaging fractures.

As the Swiss National Bank put it as they confirmed that they would not be sellers, "With gold holdings amounting to 1,040 tonnes, [Switzerland] holds a substantial part of its currency reserves in the form of gold." Other signatories clearly feel the same way! This is how they view the future role of gold at the moment.

Please note that China is Buying Gold, apparently from local mining production, at the rate of 91 tonnes a year historically. So too is Russia, now buying in the region of 4 tonnes a month on average. It bought just under 20 tonnes in July. The amounts purchased by Russia and China appear to be growing and have eclipsed this new Central Bank Gold Agreement entirely.

For instance, if Russia continues to buy at this rate, it will buy 240 tonnes in the next 12 months. While China has bought 91 tonnes on average over the last few years, they have the capacity to raise this to about 250 tonnes year too. This would exclude the amount of 403 tonnes, to be sold by the IMF. That leaves central banks big net buyers.

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JULIAN PHILLIPS – one half of the highly respected team at GoldForecaster.com – 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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