Safehaven | How to Interpret the Renewal of the Washington Agreement

March 08, 2004

How to Interpret the Renewal of the Washington Agreement
by John Lee

Gold $400.6

Twelve European central banks said they will renew their agreement to limit gold sales to 500 metric tons per year for the next five years. The agreement commences on Sept. 27, when a previous pact, known as the Washington Agreement, expires.

We wrote about the Washington Agreement in our February newsletter. In our view, the amount that the central banks agreed to sell is irrelevant. 500 tonnes of gold is worth about USD $7bil today. There are over USD $2trillion+ held by Asian central banks and Arab royal families. They can quickly soak up 500 tonnes a year without a hiccup. In fact we believe Asian bankers will be enthused and thrilled to buy up thousands of tonnes if they can somehow manage not to rattle the dollar-gold price.

Hear the tone from the central bankers.

- UK with only about 300 tonnes of gold left, opted out of the agreement. They cite no further plans to sell holdings of gold from its reserves.

- While Germany's Bundesbank is part of the deal, it may not sell any gold from its reserves "because the majority of [its] board is not supportive of selling any," said John Vail, a senior strategist at Mizuho Securities USA.

- The Swiss National Bank said it would not dispose more than 130 tonnes/yr, as it completes a gradual 1,300-tonne halving of its reserves that has been underway for several years.

The joint statement was signed by the ECB and central banks in Italy, Spain, Portugal, Greece, Luxembourg, France, Belgium, Ireland, the Netherlands, Germany, Austria, Finland, Switzerland and Sweden.

Bank of Portugal revealed in its 2001 annual report is that 433 tonnes [metric tons] of gold -- some 70 percent of its gold reserve -- either have been lent or swapped into the market. It's also reported that the Bank sold 90 tonnes of gold in 2002. This leaves less than 60 tonnes with the Bank of Portugal.

http://www.insightmag.com/news/370641.html

The Dutch sold 170 tonnes with 700 tonnes left. Austria sold 90 tonnes with about 150 tonnes left. The two standing heavy weights, France (3,000 tonnes) and Italy (official listed with 2,500 tonnes) didn't contribute to the sales during the last agreement. We believe the French will never part with their gold.

Frankly we wonder how the banks could muscle out 500 tonnes of gold a year without heavy participation from Germany.

Get back to our point. The tones of the central bankers have decidedly changed. In our view, while their decision might alter the timing of gold's ascend but not the outcome, their shift in sentiment does remove the fear of traders who are long gold. More importantly it sends a signal to those mega-accumulators that "Look there is no more cheap gold left, you should grab whatever that's around in the market and be glad you did."

John Lee, CFA
www.maucapital.com

John Lee is the founder and principal of Mau Capital Management and the portfolio manager of a mining equity hedge fund. He is a CFA charter holder and has degrees in Economics and Engineering from Rice University. Mr. Lee has a keen interest in the history of money and economics, and has previously studied under Mr. James Turk, a renowned authority on the gold market.

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