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May 30, 2003

No More 'Official Gold Sales' -
without renewal of Central Bank Gold Agreement
by Julian D. W. Phillips

Indications from authoritative sources tell us that it is unlikely that "Official" gold sales, after September 2004, will take place unless the Washington or Central Bank Gold Agreement, is renewed!

The same sources have led us to believe that the Agreement will be renewed and at possibly a higher tonnage than before, around 500 tonnes, with the sole purpose of allowing the gold price to rise in an orderly manner, for even 500 tonnes will not keep the gold price down.

This direction was indicated by the sale of 90 tonnes gold by Portugal of late, which drew relatively little attention from the media, much to our surprise. More coverage was deserved, particularly as the market is moving rapidly out of balance, at present levels, towards a shortage. The developing shortage and potentially explosive price rise has been highlighted by the continuing aggressive de-hedging process which can no longer be explained by the loss of financial incentive in hedging [low contango levels]. Yes, that would explain why hedging is not continuing, butnot the present process of de-hedging. Shareholder pressures, alongside the belief by most gold producers, that we are in a multi year "Bull" market, have, no doubt precipitated their actions, which continue vigorously at this moment.

The Washington Agreement is working well and achieving its purpose, precipitating a market situation where the gold price has to rise. It is time to understand this purpose and the effect it is about to have now and in the future.

Gold-Authentic Money has, since its inception, highlighted the role of the Washington Agreement [now referred to as the Central Bank Gold Agreement] as being far more than simply giving transparency to Central Bank present and future dealings. In reality the Agreement placed aceiling on their sales with the full intention of precipitating a turn around in the Gold price from a falling one to a rising one. Indeed, it is now becoming very clear that they wished and wish, to see anorderly rise in the price of gold, so that its "rehabilitation" as a monetary asset is credible, acceptable and we believe, necessary.

The market is now seeing confirmation of this intention. Right now, the Washington Agreement is serving toprevent "Official" supplies reaching the market,above the 400 tonnes agreed on in the Agreement. With around 280 tonnes of "Official" gold already sold in the year September 2002 to September 2003, the gold market has demonstrated a voracious appetite for gold, well in excess of the 120 tonnes remaining from "Official" supplies, coming to the market in the next 5 months.

Is the intention of the key Central Bankers towards gold an almost avuncular management of the Gold price, protecting the institutions and structures in the market? The danger is that the price will rise significantly out of their control.

It was reported by the Central Bank of Portugal that it had sold a total of 90 tonnes of Gold since later 2002.45 tonnes of gold was sold in March and April, which followed on from15 tonnes sold in late 2002, and30 tonnes sold in February, taking the total to90 tonnes in recent months. At first, some reported that these were renegade sales of gold by Portugal outside the Washington Agreement, so collapsing its credibility. However, to the contrary, it was clear thatthese were part of the arrangements made in advance of the September 1999 signing of the Agreement, and were included in the budgeted sales.

This brings home to all, that prior to the signing of the Agreement all previously arranged saleswere declared to the signatories. Based on this schedule, the figure of 400 tonnes gold sales a year was agreed and co-ordinated. Tacit agreement was indicated by the B.I.S. and the Federal Reserve, thus accounting for all the key Central Banks, world wide.No further sales were to take place other than these sales, during the next five years, after which a review of the situation would take place!

No doubt such a review would be to make any adjustments necessary to see that its purpose was achieved and would continue!

The assumption by some that this level of new sales was determined only at the W.A. was, therefore, wrong. Nonew sales were formulated. It is vital, in order to understand this Agreement that this agreementcurbed further sales.When looking forward to the next Agreement it is important to appreciate this underlying principle.

The current situation regarding "Official" gold sales, taking into account the33tonnessold by the Dutch, and the intention of the Swiss to sell a total of283t [120 tonnes remaining] this year (Sept-Sept),the full quota of 400tonnes per annum is now, publicly, fully accounted for!

The Portuguese sales are believed to be related to options structures entered into prior to signing the Accord in 1999. It would appear that this is not the end of a series of sales by Portugal These sales show, with the bankruptcy of one of their gold debtors, that Portugal could not possibly be happy with its policy of lending gold or providing options on their reserves of gold. Such market activities are not appropriate for a guardian of a nations savings. The example this provided to other Central Bankers hopefully has scotched any intention of following that path. The head of the Portuguese Central Bank, no doubt has had more than a few very sweaty moments as he explained these sales to a government suffering from a sense of humour failure. Thankfully for him they were at high market prices, but not nearly as high as could be achieved in the future, we believe. Mr Gordon Brown, the mastermind behind the sales of the bulk of Britain's gold, well below $300 an ounce, survived his humiliation from his act of dubious accomplishment, with a politicians bravado devoid of good sense. Few Central Bankers remain, who don't twitch at the thought of emulating these men.

It is expected that the remaining supply from the W.A. quota for this year until September is being sold at the rate of just over 6 tonnes a week from Switzerland, as part of the 1300 tonnes sale it arranged before signing the Agreement. However, it is suspected that Portugal has not finished announcing the sales previously arranged, so Switzerland may well have to interrupt this sale programme to comply with the Agreement, as sales from any other source will have to beat the expense of Swiss sales. The balance of the Swiss sales will then have to be postponed until after Sept 2004.

The signatories of the W.A. know precisely from whom this balance of this year's tonnage will come, as they do next years sales. Any postponement of Swiss sales cannot be added to next years sales as this quota is already scheduled up to 400 tonnes.No more sales can be used to exert any downward pressure on the price, from Central Banks, unless at the expense of eliminating further sales up to September 2003. However, it can be part of post-September 2004 sales. No statements have been issued by the W.A. signatories as to arrangements post Sept 2004 and so gives rise to a great deal of speculation.

To turn such speculation into extrapolation requires a feel, of the nuances of the thinking of these Central Bankers.

A review of the "Washington Agreement" s critical agreements is necessary. These were: -

• Gold will remain an important element of Global Monetary Reserves.
• The gold salesalready decided will be achieved through a concerted programme of sales over the next five years. Annual Sales will not exceed approximately 400 tonnes and total sales over this period will not exceed 2,000 tonnes.
• The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.
• This agreement will be reviewed after five years.

Our conclusions: -

I.		The confirmation that the sales we have seen, are seeing and will see next yearwere arranged by September 1999.
II.		This confirms our understanding that this agreementset annualceilings on the sales of gold.
III.		This attitude of the Central Banks is absolutely clear from this, that they were puttinga brake on sales.
IV.		It is the intention of these Central Bankers and we believe, the B.I.S. and the U.S. Federal Reserve, that gold's role in the Monetary system is reaffirmed eventually. It follows that this role will become more apparent and active in times when fiat currencies, in particular the U.S. $, will be enabled to benefit from this element in the World's reserves,visibly, when the governments of the countries involved decide!
V.		As 2004 September approaches, discussions behind closed doors must be about to be, or are taking place, ona renewal of the Washington Agreement.
VI.		If a renewal does not take place, reliable sources we have feel thatNO key Central Bank Sales will take place post-September 2004.
VII.		It makes absolutely no sense to place such a ceiling on sales, for five years, only to abandon such limitation, at the end of that period. It is clear that such limitations will take place in the future [as we have discussed in earlier articles in G-AM].No definite arrangements have been announced for future sales, to date.
VIII.		Bearing in mind the success of the agreement so far, in turning the gold price around from a falling price to a rising price with considerable underlying orderliness, any future sales will hope to continue an orderly rise in the price.This is not the same as a slowly rising price, nor does it indicate prescribed levels, simply a price which is credible, whatever level it should go to.
IX.		We have no doubt thatthe 15 signatorieswill keep their obligations under the Washington Agreement, limiting Central Bank Sales to the remaining 126 tonnes, until September of this year and the 400 tonnes to be sold next year.Thereafter, they will stick to any renewal of the Central Bank Gold Agreement.
X.		If gold is to remain"an important element of Monetary reserves",the E.C.B. intention of keeping it at15% of reserves,can only be ageneral indication of levels of reserves at the current prices. To hold this levelwould imply that they have "fixed" the price of gold, in terms of their currency reserves, mainly the $, which is most unlikely! We cannot see the two positions as consistent.The prospect of gold sales taking place whenever a hefty price rise occurred, would be counter productive and against the spirit of this agreement.
XI.		Indeed for gold to remain an important element of gold reserves andsit comfortably with governments [not necessarily Central Bankers]it must be in asupport role to paper currencies.For it to remain such an important element of monetary reserves successfully, in this world, it can no longer have a control element in it role, as it had in the past. It has tosupport and not define, changing levels of money supply. With the global economy favouring a growing money supply, this would take the form of a continually rising price.
XII.		A simple reflection of the gold price in local currency terms expressed of a nation's reserves, at whatever level it sits, would initially be sufficient for it to provide some support for these currencies. Its role would be pragmatic and unobtrusive.
XIII.		The next Central Bank Gold Agreement,is likely to set ceilings to sales of Official gold again, even if none are already arranged [ or do not take place], or to confirm atermination of Official gold sales.
XIV.		London Dealersare of the opinion that sales of 500 tonnes a yearmay be agreed, with the prime purpose of stabilising the rise in the price of gold. They feel that 500 tonnes would be insufficient to hold the price down. If this proves to be the case it will be so only if the C. B. 's intentions are to utilise gold in the Monetary system, as we described above, in the relatively near future.
XV.		In the unlikely event that no renewal of the Washington Agreement takes place, indications and our feelings are that no further key Central Bank sales will take place from Sept 2004 onwards.

Market Impact

Official Market

We have the prospect now, of China encouraging the acquisition of gold by its citizens and itself, through the freeing of internal gold markets and the steady accumulation of gold in its reserves. Chinese off-take, once it has gained momentum, may equal annual newly mined gold in total, eventually [as we explained earlier].

In addition, Russia has taken a similar stance, publicly stating a pro-gold position and accumulating more gold in its reserves [Simply by adding local production to reserves].

We see the beginnings of an gold Dinar in Middle Eastern countries.

All in all, a discouraging picture for Central Bankers, intending to sell gold. The only vocal prospect of gold sales comes from the President of the German Central Bank, Herr Welteke, feeling out public opinion, on the prospect of German Gold sales. After previously indicating that small sales of gold from German reserves were possible, he subsequently said that the Bundesbank would only sell Germany's gold, provided it was able to invest the proceeds in income earning assets.

He well knows that it would take the changing of the country's laws to stop the proceeds from going direct to the German government. In saying this, he, in our opinion,moved away from the prospect of sizeable German gold reserve sales.

It is becoming clearer by the day, that there is a diminishing enthusiasm amongst Central Bankers to sell their gold.

Open Market

• That the demand on rising prices swallowed Portugal's 90 tonnes, so easily, shows the increased appetite of this market. With newly produced gold supply on the wane and the absorption of this large quantity, it is crystal clear that the remaining 123 tonnes, to be supplied from now to September 2003 by the "Official" suppliers, isnot sufficient to satisfy this market!
• Those who need to buy at these sorts of price levels [Producers who are aggressively de-hedging] are now on notice to do it quickly, or pay higher prices. This realisation willprecipitate further demand from the largest buyers in the market.In the first quarter of this year to date disclosed de-hedging is at 141 tonnes, but we feel that that figure may be substantially higher.With most gold producers being of the belief that we are in a multi year bull market in gold, de-Hedging could equal last years levels,should the gold price rise to closer to the $400 level again. To wait to above $375, would ensure losses on these hedges, so with gold at current levels [$340+ ] de-Hedging should be taking place as fast as the market can accommodate.
• Further "new" supplies canonlycome from Dis-hoarded, or Scrap gold.A higher price will be required to prompt this supply.
• Once they realise the coming tightening of the market, physical buyers will also be aware of the supply shortage situation andcould well secure supplies in excess of requirements ahead of a large price rise?

Conclusions

• We cannot ignore the Washington Agreement and its future successor any more. It is proving very successful! No doubt many of the Bullion Banks and Hedgers would have had many disasters had it not been in place. If these institutions don't take advantage of this "extra" supply to the market, they will face these disasters, because the "Official" supplies are dwindling rapidly this year and the 400 tonnes scheduled for next year arelooking insufficient to hold the price down. If we are right, the maximum impact of next years supply of 400 tonnes, will, at best,simply keep the market orderly in its rise, just as the key Central Bankers want.
  
• The next Central Bank Gold Agreement, will aimto reinforce the last one in its purpose, but not necessarily in its application. The next agreement can accommodate a lower, a higher, or the same level of sales as the present one, butit remains to be seen whether there will be willing sellers, in the face of the dubious stability of the $.
  
• It may even be that this next Agreement accommodates a 'new' method of valuing Gold in the signatories "Official" Reserves at$ market prices, as a first step to the re-affirmation of gold's support role in the Monetary system.[More on that later]

Julian D. W. Phillips
Gold-Authentic Money

"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. FIND OUT MORE

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