Gold Prices dumped 18% in thin trade over the last month. Why...?
IN THE WEEK ENDING the 25th of July, a decrease of €578 million in "gold and gold receivables" – reported by the European Central Bank – reflected the sale by two Eurosystem central banks roughly equal to the sale of just over 30 tonnes of gold, notes Julian Phillips of the GoldForecaster.com.
The following week (ending Aug. 1st) there was a further decrease in European central-bank gold reserves of €26 million worth of Gold. That reflected a sale by one Eurosystem central bank and the purchase of gold coins by another, roughly equating to an overall sale of around 1.40 tonnes of gold.
And then last week (ending Aug. 8th) there was one solitary sale by an ECB bank reflecting some 0.76 tonnes.
Since that sudden, large sale, the Gold Price has slumped almost 18%, reaching a seven-month low. It came after many weeks where between only one and 2.5 tonnes of gold was sold under the Central Bank Gold Agreement that came into effect on 27th September 2004. The current year of the Agreement is due to end on 26th Sept. 2008, and this – the second – CBGA will finally expire in Sept. next year.
Could a sudden decision to sell central-bank gold into the market help explain the recent sharp drop in price?
In the past, Greece has been a buyer of coins for its reserves. We are pretty sure that Switzerland was responsible for around 1 to 2.5 tonnes of the previous weeks' sales, prior to the week of July 21st. But the balance most likely (we cannot be certain of this as this information is not yet published) came from a signatory that had not announced ahead of time how much it would sell.
This pattern of the sudden arrival of a seller who sells without regard to the impact on the Gold Price is very much in line with a pattern set last year by Spain. It sold primarily to fill some of the gap in its own budget deficit. After all, economy Finance Minister Pedro Solbes said in May 2007 that the central bank would sell gold to buy bonds, but so far that has not happened. The Bank last held a sale for gold in July 2007, when it sold 24.88 tonnes (some 0.8 million troy ounces).
While we thought it may have been Spain selling, during the week of July 21st the Bank of Spain's gold reserves were unchanged at 281.62 tonnes. Maybe the information still needs to be updated, but we must wait for confirmation of who made this sale when it is published.
Whoever has been selling, have they stopped selling now? The end of July and start of August only saw net sales of one tonne per week, which takes us back to the previous pattern. That leads us to believe that it was Switzerland that keeps selling and will continue to do so until it has completed its sales. (The residue is now well below 50 tonnes).
As to the seller of that 30 tonnes, it appears that their selling stopped quick-smart. Indeed, overall, the signatories to the Central Bank Gold Agreement appear to have lost their appetite for selling gold because interest paying reserves of these central banks – where not denominated in the Euro – have been paying it in a currency that has been depreciating faster than the instruments were accruing interest.
Gold, meanwhile, although not paying interest, has been appreciating faster than any of these reserves over the last seven years, making it a more than useful "counter" to the swings in the US Dollar.
The Euro/Dollar exchange rate continues to dominate the Gold Price and has stayed within the $1.54 to $1.60 range for the last few months. This of course is the wish of the G-7, who no doubt exert their own influence on the rate. Having said that, we do not believe that the signatories to the Central Bank Gold Agreement are influenced by this Euro/Dollar exchange rate, as to when and how much Gold they will sell. It is a background concern of these signatories that the Gold Market should not be affected directly by their sales of gold and will try to sell in such a manner that will not affect the gold price.
The large 30-tonne sale of three weeks ago undoubtedly made the Gold Price buckle at the knees for a while and sent it on a downward path.
Whoever sold that gold, we believe, did it for reasons other than wanting to get rid of their gold reserves. We are of the opinion that it was sold for budgetary reasons, where the country wanted to raise cash quickly. Central banks in Europe are satisfied that the Euro is now an established currency so the underlying reason for selling gold has now been removed.
All told, in fact, we are strongly of the opinion that the European central banks that are signatories to the present Central Bank Gold Agreement are no longer keen to sell their reserves of gold in view of the uncertainty over the global economy, monetary system and the Dollar. But a primary reason for entering this agreement – first known as the "Washington Agreement" in 1999 and then the "Central Bank Gold Agreement" in 2004 – was to dispel the previously held view that central banks were keen to get rid of all the gold they had in one go.
Once the first Agreement was announced, the Gold Price turned upwards and the long bull trend in gold – still underway – commenced. Such an Agreement reassured the Gold Market that the amounts to be sold would be handled in an orderly, manageable manner so that they would not depress the Gold Price.
Initially, the maximum amount that could be sold under the "Washington Agreement" was 400 tonnes, but was increased to 500 tonnes under the "Central Bank Gold Agreement". It is clear that this ceiling will not be met either in this year of the Agreement or in the final one, ending on the 26th September 2009.
So what "ceiling" would a future Agreement propose? It is likely to be in the same region as the previous two Agreements because it is a "ceiling" – or maximum amounts – obviating the need for a defined sales amount. If it were 500 tonnes again, the signatories are permitted to sell only 10 tonnes if they want.
There is a possibility that the Agreement will not be renewed because it is unlikely that the European central banks who committed themselves to selling will continue to do so, for many have not reached the levels they said they would do. Certainly Germany, who although was given an option under the present Agreement of selling 600 tonnes, has declined to do so. Italy has made it clear that it has NO plans to sell any Gold and the others have not added to the amounts they previously announced they would sell.
Portugal and Austria have not sold for over a year now, but previously intended to do so. Therefore the willingness to formulate an Agreement based on intended sales has also lost most of its punch. Any such new Agreement will only serve to reassure the market that it need not expect floods of central bank gold sales. This could only be gold-positive.
The International Monetary Fund (IMF) – if they get the blessing of the US Congress to do so – intends to sell 400 tonnes of gold in the future. But it has not been able to set a time table as it is not a foregone conclusion that they will be able to sell this gold. They have made it clear that they will sell it under the auspices of the Central Bank Gold Agreement. What this means still needs to be clarified. But to date the IMF has been at pains to tell the world that they will not sell in such a way as to depress the Gold Price.
Clearly the IMF wants as much currency as it can get for this Gold. Certainly a direct sale to one of the surplus countries would be a clean, effective way of getting rid of it at one price for the entire amount...but wouldn't that also be considered gold positive?