Commodities | May 03 2007
By Greg Peel
Under the Washington Agreement, which was re-jigged in 2004, European central banks can sell up to a total of 500t of gold per year (Sep-Sep). Last year was the first time the banks failed to sell up to their quota.
The belief was that the same thing would happen this year, and perhaps even less gold would be sold. This is one of the factors often touted by gold bulls. However, European banks began selling heavily a few weeks ago as gold began to push back towards US$700/oz, and that selling just doesn’t seem to have slowed down.
Could it be that the central banks actually do intend to sell up to their quota, converse to all opinion?
Central bank activity represents around 13% of average gold market trading (if you don’t count swaps and loans). While the bulk of the world’s bullion is collectively held by gold investors, 90% of official gold reserves are held by only 20 banks.
Last week another 12.3t of gold were sold by central banks, bringing the seven week total to 89t. Resource Investor calculates a total of 200t have been sold under the quota this year. If sales remain at an average of 12.5t per week (last seven week average 12.7tpw) then the Washington Agreement signatories will reach their 500t quota.
The biggest seller has been Spain, which sold 40t in March alone, bringing its total to 66t. France had sold 69t to march, the Netherlands 16t and Sweden 4t, bringing the total to 155t. Another 40t has been sold in April, which is probably France and Spain, experts suggest.
While the situation is currently looking a bit ominous, most pundits agree that it is unlikely the 500t quota will be reached.
Resource Investor reports Virtual metals’ Matthew Turner notes most central banks work on a basis of reducing their holding by 50%, which only implies another 100t or so. Turner is anticipating another 30t from France, which is consistent with plans to sell 600t over five years, another 35t from Spain, to match France, and 27t from the Netherlands in order to match its plans. All up this would mean about 300t of sales for the year – similar to last year.
Turner can’t see the quota of 500t being reached unless there is a new seller. This might be perhaps Portugal, Austria or Italy. Germany has insisted it will not sell any. France or Spain could possibly sell more they have flagged, but this is unlikely.
This view is fairly consistent across the market, including forecasts from the respected GFMS report. Blanchard & Co’s Neale Ryan notes that last year gold sales began to fall away in the northern summer months providing, he suggests, now as a good entry point for investors.
Last year similar gold sales had a significant impact on the market in May, but then we were in a bit of a blow-off top. Sales this year have, however, failed to dampen the market’s enthusiasm much at all.
Respected gold watcher Dennis Gartman notes the confusion in the market caused by central bank selling, but remains bullish overall. He does, however, suggest a near term correction back to US$660-662/oz could well be on the cards as recent gold longs become frustrated. A break of the US$670/oz level could set off a few stops and the final drop might be rather sudden.