Central Bank Sales

Lately, there has been much talk in the financial media about large gold sales by central banks, and the negative effect this has had on the metal's price during the late spring months. Since such talk tends quickly to degenerate into static, we'll try to clarify what it all means, as well as draw a few conclusions.

The European Central Bank, along with the central banks of the major European countries (excluding Britain), are all signatory to the Central Bank Gold Agreement (CBGA, also sometimes called the Washington Agreement, after the city where it was signed). They are the primary sources for the release of stored physical gold into the marketplace.

Under the terms of the CBGA - which runs from September of 2004 to September of 2009 - the signatories are limited to collective gold sales of 500 tons in any given year.

They haven't made it yet. In Year 1, about 492 tons were sold. In Year 2, 390 tons. We're currently in Year 3. At the end of April, with about 5 months to go, they were at only 195 tons, which makes it very likely they'll not even come up to last year's total.

But they've been dumping gold of late, haven't they? Yes. In the seven weeks ended April 27, nearly 89 tons were sold. That's going to have a depressive effect, no question. The good news is that, even though gold retreated, it held up surprisingly well despite the large increase in supply.

The question is whether those sales represent a trend, the beginning of increased sales between now and September, since there's so much selling room available. Or whether it was just an opportunity to take advantage of high prices, to net the banks a nice influx of capital. The banks themselves aren't talking - surprise, surprise - so we will have to guess.

We think this was a temporary spike in sales, for a number of reasons. First, as noted, sales have already been dropping, year-over-year. Second, it was a significant deviation from previous months' patterns; in the seven-week period prior to this one, for example, only a bit over 20 tons was sold. Third, several major central banks (Germany, Switzerland, Portugal and Austria among them) have announced that they're through selling for the year. Fourth, the banks only have so much in their vaults, and this level of sales is not sustainable for very long. And fifth, summer tends to be a quiet season in all aspects of the gold market in any case.

We fully expect that selling will fall short of allowable quotas, not just this year, but for the following two years of the Agreement as well.

And another thing to consider is that many central banks outside of the CBGA system have been net buyers of gold. Russia, South Africa, China and others have all added to their stockpiles this year.

So when you hear that central bank gold sales are pushing down the price by flooding the market with metal - not to worry. Just remember that demand has absorbed every bit of supply so far, without any serious correction. Imagine what will happen when central bank sales slow, as they inevitably must.


When central banks turn from sellers to buyers - as Russia, South Africa, China, and recently Qatar have done - your red alert flags should go up.

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Posted 07-24-2007 12:05 AM by Doug Casey