Commodities | Jun 15 2007
By Greg Peel
It’s almost but a distant memory now that the gold price has made several attempts to break the US$700/oz barrier in recent months. In each case the market has been met with some significant selling from European central banks trading under the Washington Agreement. While it is roundly expected that the banks won’t collectively reach their 500t quota in 2007, the extent of recent selling has led to concern.
One major seller has been Spain, the central bank of which has unloaded 108 tonnes into the market between March and May. The reason for the sales, according to the Spanish finance minister, is that “gold is no longer profitable”. The aim is to reinvest in bonds and receive a better return. This statement, however, has proven controversial.
Data from the Bank of Spain show that all foreign reserves have been falling along with gold holdings, the London Daily Telegraph reports. These include reserves of US, British and other global bonds. Total reserves have fallen by two-thirds to 13.2 billion euros since 2002. In contrast, France (76bn) Germany (86bn) and Italy (60bn) have maintained their levels of reserves since the launch of the euro. Spain’s holding represents only 12 days of imports, and experts suggest the country could hit a real crisis were the booming property market to turn. Under EU rules, the other member banks are obliged to bail each other out should a crisis ensue.
Critics suggest the sales reflect the fact that Spain’s current account deficit is completely out of control, having reached 9.5% of GDP.
Whatever the situation, gold bulls had been hoping that Spanish sales, and sales from other Washington Agreement countries, were reaching an end for 2007. Their hopes were dashed yesterday when Switzerland announced it plans to sell a quiet 250 tonnes of gold as well. The Swiss central bank is the world’s fourth largest holder of gold after the ECB, the US and the IMF. The Swiss franc has long been considered the “other” global reserve currency, given the popularity of the “Swiss bank account”. Analysts had assumed Switzerland’s selling days were over, given the central bank divested of 1,300 tonnes over 2002-04.
250 tonnes represents a fifth of Switzerland’s remaining holdings, and the bank intends to ease out the volume between now and September 2009. In the Swiss case, gold sales are not about current account problems but about simple reserve management. As the price of gold has risen relative to holdings of other assets, sales are required to bring the percentage value of gold within reserves back to the desired level.
Sales of 170 tonnes from European central banks over the last three months represent the most concentrated dumping of gold since the Washington Agreement began in 1999.
Does this mean gold is destined never to see US$700/oz? Gold bulls are bruised but undeterred, the most enthusiastic of which are still calling gold over US$1000/oz once the US dollar inevitably collapses. As global inflation indicators creep up, the gold price has managed to stave off a significant technical collapse in recent weeks. An increase in the price of oil has also helped.
The Swiss announcement did not thus rock the boat in the gold market last night, as the metal managed a small rise to US$651.20.
In other news the Gold Anti-Trust (GATA) committee will retain the services of legal counsel to use the Freedom of Information Act to reveal just how much gold is actually held by the US. Under IMF rules, central banks are required to disclose their physical gold sales but disclosure becomes uncertain when banks undertake gold leasing and derivative sales. GATA has long contended that the US has conspiratorially acted to suppress the gold price through such means in an attempt to prop up a sliding US dollar. Were it revealed that the US Treasury effectively held a lot less gold than it claims, the gold price would surely run and run hard.