New Central Bank Gold Sales Agreement Cuts Back on Sales

Friday, August 07, 2009



The ECB today released the extension of its central bank gold sales agreement (CBGSA) for another 5 years while cutting back planned sales from 500 to 400 tons annually.
Maybe central banks have rediscovered that gold reserves are undoubtedly the best performing asset class on their balance sheets. The CBGSA or Washington Agreement was signed by 18 central banks, with the Federal Reserve being absent like in the decade before.
From the ECB release (HT Beans, Rice and Gold):
In the interest of clarifying their intentions with respect to their gold holdings the undersigned institutions make the following statement:
  1. Gold remains an important element of global monetary reserves.
  2. The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2009, immediately after the end of the previous agreement. Annual sales will not exceed 400 tonnes and total sales over this period will not exceed 2,000 tonnes.
  3. The signatories recognize the intention of the IMF to sell 403 tonnes of gold and noted that such sales can be accommodated within the above ceilings.
  4. This agreement will be reviewed after five years.
Bloomberg has a good write up on the matter, pointing out that the IMF has not signed the agreement, opening the possibility that the IMF's intent to sell 403 tons of its 3,217 ton hoard in one go to one country may become a reality.
“It’s positive for gold,” John Reade, an analyst at UBS AG in London, said by e-mail. Having the agreement “removes the small chance that European central banks would have dumped gold onto the market in an unconstrained manner.”

Central banks sold 73 percent less gold in the first half and full-year disposals may drop to the lowest since 1994, according to estimates from London-based researcher GFMS Ltd. The IMF wants to sell 403 tons from its reserves of 3,217 tons, the third-largest holding after the U.S. and Germany.

“The IMF has not signed and this leaves open the possibility that the Chinese, Russians, another central bank, could buy the 403 tons of IMF gold in one go,” Reade said.

China has the world’s sixth-largest holding at 1,054 tons and Russia is ranked 10th with almost 537 tons, World Gold Council data show...

The Swiss National Bank, one of the signatories to the new accord, in a statement today said it isn’t planning any gold sales in the near future, and that its gold is an important part of monetary reserves. Switzerland has 1,040 tons of gold, making it the seventh-largest holder.

Bullion sales under the current agreement total 140 tons in the current quota year, with France and the ECB leading sales, the World Gold Council said July 29. Central banks have sold about 3,867 tons since the first agreement, and failed to reach the allowed limit each year since 2005, its data show.
Central banks of China and Russia will probably be delighted to see their efforts to build up larger gold reserves helped by European central banks at low prices. China has overtaken India as the largest gold importer this year.
In the long run the massive sales of gold may be seen as the biggest fallacy of central banks next to their premature rate cuts, leaving them now out of ammo.

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