Are Goldbugs Exaggerating CB's Negative Influence On The Gold Price?

Thursday, March 09, 2006

Avidly reading websites of (and for) goldbugs like GATA (Gold Anti Trust Action), SafeHaven, Resource Investor, Kitco, Financial Sense, and 24hGold I notice that most setbacks in the gold price are attributed by commentators to sales by central banks or the bullion banks. At least in the case of Eurozone central banks the goldbugs hypotheses do not work unless one would suspect unlawful dealings which I for my part rule out at least for the Euro area.
I have to add that the Bank of England, infamous for dumping most of its gold treasure close to gold's multi-year low in 1999, is not a member of the ECB.
Rereading the two almost identical ECB statements on gold from 1999 and 2004 it is worth mentioning that the statement about gold derivatives was expanded.
  • 1999: The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.
  • 2004: Over this period, the signatories to this agreement have agreed that the total amount of their gold leasings and the total amount of their use of gold futures and options will not exceed the amounts prevailing at the date of the signature of the previous agreement.
While this still leaves wide room for speculation what is meant by "total amount" - number of contracts, book value or marked to market - one can nevertheless derive the idea that Euro central banks have a declining market share in gold-linked derivatives, which have been booming lately.
Assuming that the Eurozone is out of the way for gold a look at the statistics of other central banks give no hint either who are the heavyweights in the market of uncertainty. Most central bank balance sheets show a steady valuation of gold that gives no indication on any derivatives activity. But one should not forget that former Fed chairman Alan Greenspan said in 1998, "Central banks stand ready to lease gold in increasing quantities should the price rise" GATA Secretary Colin noted in today's newsletter.
The Federal Reserve lists its gold stock month after month, year after year, a tad over $11 billion, although gold's book value is based on a fictional gold price of $42.22; resulting in 263 million ounces or 8,175 tons held by the Fed. Today's market value is $144.6 billion. Gold derivatives are not mentioned in the Fed statistic.
The German Bundesbank, second biggest gold holder after the USA, states gold reserves with a book value of 35.5 billion Euros in its annual report 2004 (pdf). There is no footnote on gold's valuation. The independent German Bundesbank has been absent from the gold market for years, successfully resisting attempts of government after government to lay its hands on the gold hoard to mend holes in the gaping budget deficit.
The People's Bank of China stated its gold reserves for 2004 (latest available data) at 19.29 million ounces or 600 tons.
What all reports have in common is that they lack any information on gold derivatives activities at all and give no clues about gold leasing volumes.
While goldbugs tend to see the central bank gold sales agreement in the Eurozone as a roadblock on the way to higher prices I am beginning to form the opinion that it may actually help the gold price because rapidly rising gold demand would require far bigger sales in order to hold the price down. At 500 tons the CB's annual gold sales contribute about 17% to total gold supply, based on a global gold production of 2,466 tons in 2004.
With a probable decline in production in 2005 and no major expansion of mining expected this year the upper limit in the gold sales agreement can become a support tool for the gold price.
And the agreement could even turn into one of the biggest boosts gold could see: when it is revoked prematurely. Imagine the market reaction. The current agreement expires in 2009 and such a possibility is not out of the way once central banks find out that they cannot stop a primary market trend in a world of growing uncertainties and mounting debts.
I end with my perma-recommendation: Buy the pullbacks and don't try to sell the rallies.

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