Gold - Will Central Banks Sell Out or Are They Sold Out?

By: Julian D. W. Phillips | Fri, Dec 5, 2008
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From 1980 right through to 1999, the gold market had the possibility of enormous central bank gold sales hanging over the gold market. 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 but removed the ability of U.S. $ holders to change their dollars into gold. This left the $ and all other currencies without any backing except the promise from central banks to change paper dollars into paper dollars. This would not have worked nearly so well had the U.S. not had the power to ensure that the oil market was bound to use only U.S. dollars as payment for oil. This entrenched the $ 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. 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 has 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.

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" wherein European central banks agreed to limit their sales to 400 tonnes a year for five years. This reassured the gold market that it would be threatened no more by unlimited sales from central banks as the Japanese and U.S. 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?

A second central bank gold selling agreement was made for the next five years in 2004, called the "Central Bank Gold Agreement". We have now begun the final year of that agreement. Take a look at the Table below to see what the signatories have sold so far and what left to sell in until the 26th of September 2009.

The Table shows that the amount of gold that they announced 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, 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.

Central Bank Sales
As of the 28th November 2008

Central Bank Gold Agreement 2004-2009

Year 1
Year 2
Year 3
Year 4
Year 5
E.C.B. 235 47 57 60 72   0
Germany 12 5.4
[for coins]
[for coins]
[for coins]
4.3   0
France 600 115 134.8 115.1 101.6   133.5
Netherlands 165 55 67.5 14 19.5   9
Portugal 200 54.8 44.9 0 0   100.3
Switzerland 380 130 0 113 126.1   10.9
Austria 90 15 13.7 8.7 0   52.6
Sweden 60 15 10 10 9.3   15.7
Spain 0 30 62.5 149.3 0   ?
Belgium 0 30 0 0 0   ?
Not Identified   ?   0.5 12.75 24.85 ?
1742 437.2 333.2 325.8 345.5 24.85 296.4
Russia 0 0 0 22 34.8    
Greece 0 0 0 3.8 [?] 0.8? 1  
0 0 0 25.8 ? 1  

Notes to table: -

  1. This now includes the unannounced sales for both years from Spain & Belgium, which totaled 177.1 tonnes for the two years.
  2. We have excluded the unannounced sales from the totals as to retain accurate levels of decline in announced sales.
  3. Germany's sales were for coins, which we do not regard as part of the announced sales for the purposes of this situation.
  4. The remaining sales for individual countries will be corrected once the three monthly figures are available. The total is the most accurate figure, but will then be adjusted too.
  5. Switzerland's additional 250 tonnes to be sold has been included.
  6. We have now included Russia's purchases for last year.

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 I.M.F. wants to sell. But this can only happen if the U.S. 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 OK, the way of selling could take many forms including auctions and an outright sale to selected buyers [as happened in previous I.M.F. 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.

Italy to sell?
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. [U.S. gold reserves form 77.3% of their reserves - but the U.S. 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 direcly 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.

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.

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