Commodities | Oct 12 2007
By Greg Peel
On September 27, the third year of the Washington Agreement on Gold ended. Under the five-year agreement, signatory European central banks are allowed to sell a total of no more than 500 tonnes of gold bullion in the year. This is the second five-year Washington Agreement, the first having been signed in 1999. The intention is to basically prevent the central banks of Europe jumping over each other to sell gold and thus knocking down the value of holdings for everyone.
At the time of the Agreement (so called because it was signed in Washington) gold was at its recent nadir around US$250/oz – hence the concern. By September 2004 gold had rallied to US$400/oz, with a bullet, but they decided to go again, upping the limit from 400t to 500t. With gold finishing around US$730/oz this year, questions are already being raised as to whether there needs to be a third agreement in 2009.
The signatory banks are those of Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, Switzerland, Greece and the European Central Bank. Collectively, all central banks and the International Monetary Fund hold 30,374 tonnes of gold bullion (at least supposedly, but that’s another story). Germany’s Bundesbank is the second biggest holder behind the US Federal Reserve.
In the first year of the current Washington Agreement, 497.2t of gold were sold. Last year only 395.8t were sold. This year it looked like it would be another slow year until one or two banks began to run amok – particularly Spain – and ultimately 475.75t were sold.
While the banks themselves have to discuss their selling intentions between each other, the gold market does not know who has sold what until more than a week after the event. It will, however, recognise that something big might be going on. In the past year, a lot of selling has hit the market every time gold looked like making a run for US$700/oz. This selling included the WAG banks and the Fed in some way shape or form (that other story). The WAG banks then laid off, and the Fed dramatically cut its cash rate and stopped selling gold. Voila – US$750/oz.
Hence it is important to gold traders to try to get a handle on what WAG bank intentions might be for the immediate future, however no bank is under any obligation to telegraph its intentions, or indeed decide upon its intentions ahead of time. Nevertheless, some do. Switzerland has indicated it intends to sell 250t of gold before the WAG ends in 2009. It will do so in an orderly fashion, with no intention of knocking down the gold price. The only reason for the intended Swiss sales is that gold is much more valuable now, and Switzerland has a target proportion of gold in its total reserves. It has to sell some of its 1,250t to get back inside the valuation target.
Germany is another who has let the market know what it’s up to. In WAG 07, that was “not much”. But as the Bundesbank holds 3,422t of gold and the gold price is moving up very nicely thank you (including against the euro) speculation has been growing that Germany might just start hitting the market after September. Well now those fears have been laid to rest.
Reuters reports Germany does not intend to sell any gold in WAG 08, other than 8t to provide for its coin minting program. At least, the Bundesbank intends to sell no gold, because as Reuters suggests the reason is the central bank doesn’t want the government to get its hands on it. This is in stark contrast to the Bank of England, which had no choice but to stand by and let then Chancellor Gordon Brown sell half of Britain’s holding at the bottom of the market in 1999. That, basically, is why the Washington Agreement was signed in the first place. (Brown sold the gold to help the Americans save the US dollar following the collapse of LTCM).
While no German sales may be a relief to gold bulls, unfortunately it actually opens the door for one of the other signatories to eat into Germany’s 120t quota. Germany has offered as much. A couple of the European economies are individually looking a bit wobbly (Spain is one, and Italy’s got a cold), so it may yet be that we see WAG sales stepping up again some time soon.
Perhaps when gold approaches US$800/oz?
