Commodities | Sep 27 2006
By Greg Peel
It has been hanging over the gold market for the last two months.
Frustrated by rampant central bank gold sales following the collapse of hedge fund Long Term Capital Management in 1998 (which went down with a big enough short gold position to bring the financial market to its knees) the central banks of Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, Switzerland, and England agreed to limit their total gold sales to 500t per year under a five year pact, commencing in 1999.
At the time, the signatories accounted for 50% of the world’s official gold holdings. The pact was renewed after five years.
For the last couple of months, gold speculators had been closely watching official gold sales and had began to become concerned when it was apparent the signatories were being particularly tardy. Were they not going to sell? Were they all going to dump in one big hit?
As it turns out it was a bit of both. The banks did sell gold, which helped the price down from its US$650/oz interim high, and the fall was likely exacerbated by cautious buyers getting out of the way. However, now that the deadline has passed it has been revealed that they didn’t sell all they could. This is the first time the quota has not been met since its inception.
Gold Fields Mineral Services, the world’s pre-eminent gold market monitor, announced that sales amounted to only some 400-420t of the 500t allowable. The Financial Times reports GFMS believes the shortfall will likely be repeated over the next three years of the agreement.
"When you look at the signatory countries it is hard to see who is going to step in and take the sales up to 500 tonnes", said GFMS.
France accounted for 30% of sales, Switzerland 15% and The Netherlands 14%. France is forecast to sell 344t by September 2009 and The Netherlands 43t. Switzerland is done. Germany has barely sold any of its 3423t. Italy has shown no sign of selling any of its 2451t. GFMS suggests the overall shortfall of sales into 2009 could be as much as 855t.
GFMS doubts the agreement will be renewed.
On the flipside, no one appears to have bought either. Mongolia’s purchase of 9t this year is so far the largest. The fall in the gold price was no surprise when it’s considered that by July, the signatories had only sold 331t.
This news should be very bullish for gold, although that is not yet apparent. One reason is that central bank gold selling usually meets jewellery demand the other way, but to date such demand has been muted. GFMS is forecasting jewellery demand to fall by 18.6% this year, at the higher price. This would fall short of world gold production, effectively opening up a hole in the market.
However, GFMS’s fears may yet prove to be unfounded, if recent reports coming out of India are anything to go by. See “Banks Buy Up For Indian Gold Rush”, 27/09/06.