The Central Banks involved in the 2004 Central Bank Gold Agreement are to announce the amounts of gold they intend selling under this agreement at the I.M.F. meeting early October.

At present they have already agreed that there will be a 'ceiling' of 500 tonnes of gold sold per annum under this agreement. We have been led to believe that this is the amount that will be sold each year. However, announcements made subsequently, have not confirmed that this amount will, in fact, be sold. Since the agreement [See details at the end of the article] was announced earlier this year, the market has been waiting expectantly for confirmations of further sales. As of this moment intended sales may well fall short of the 500 tonne ceiling. The "Washington Agreement" is due to terminate on the 26th of September this year and the new agreement will come into force thereafter. These announcements we believe will demonstrate the continued value of gold in the reserves of the European Banks, despite these sales. It may well be that these announcements confirm our expectation of lower sales than the 500 tonnes but imply that the sales that do take place will be conducted in such a way as to stabilise any overheated market. A look at the present situation leads us to expect certain likely announcements in October, in Washington at the I.M.F. annual meeting.

The Present Situation

The market has factored into the gold price, minimum sales of 500 tonnes per annum for the next five years, by Central Banks. Reductions in this amount will have to be factored into the price subsequently.

Earlier this year, under the previous Bundesbank President Ernest Welteke, it appeared certain that Germany was marching ahead to sell 500 tonnes under the new agreement. All in the market expected that that these sales would be spread evenly over the five years. But Alex Weber, the new Bundesbank President said earlier this year, "the decision on how much gold the German central bank would sell depended "on the outcome of discussions with 12 other central bankers representing nations using the Euro, on currency reserves". The Bundesbank considers gold a form of "natural hedging against strong swings in the dollar" and is giving it "an important role" in the management of its funds, Weber said. No further talk of the sale of 500 tonnes of gold from Germany has been heard since. So far, we are led to believe that Germany has only requested an option to sell this amount from the other signatories of the new agreement. It will take Germany's Parliament to pass new legislation to permit such sales. No such planned legislation has been announced to date. We expect them to announce the quantity they sell in Washington too.

• France's Finance Minister announced possible sales of 600 tonnes, and was supported by a seemingly reluctant Noyer, the Governor of the Banque de France. His reluctance was apparent in the statement he made after the potential sale of France's gold was made, when he said, "the central bank will wait until gold prices are "appropriate" before agreeing the sale, adding that a decision will be made either by the end of this year or the beginning of 2005. In addition, he added "The bank will certainly take into account the price. If we feel the timing is not appropriate, then we will wait". If we understand correctly, he appears to have taken certain backward steps since then. No firm announcement of sales has been made. We expect an announcement from them in early October too. Their policy as stated appears now to be the one adopted by the other signatories.

• Italy has been silent on gold sales from their reserves. It has the potential to sell 1700 tonnes if it reduced the gold content of its reserves to the same level of those held by the European Central Bank.

• Portugal previously indicated it would be a happy seller of gold within the new agreement, but has made no announcement of sales to date. It has the potential to sell 969 tonnes.

• Holland has confirmed their previously announced sales, through the Dutch Central Bank President Nout Wellink, of the remaining 50 tonnes of its gold, planned to be sold under the "Washington Agreement", under the new agreement, plus another 100 tonnes. This is a continuation of its long term policy to sell gold.

The changes in attitude to gold.
During the year to date, Europe's Central Bankers have been reviewing the importance of gold in their reserves. Undoubtedly there has been a change in their attitude to Gold markets recently. With the risk now attendant in holding U.S. $ as the main reserve asset, the qualities of gold as a solid monetary instrument have become increasingly clear. As there is no possibility of the $'s role being reduced in the monetary system for many years, the position of gold has been reinforced as a present effective alternative to currencies in general.

• This was aptly demonstrated by the move of Argentina in buying 42 tonnes of gold for its reserves. Its tragic recent history of the $ standard and the disastrous exit from this system, turned that country back to gold.

• China's Central Bank Governor, in appreciating the difficulties in purchasing gold for the Central Bank, is actively encouraging the purchase of gold for its citizens, pointing out the value of the metal in countering inflation and price shifts. It is more than likely that the demand for gold from China will be enormous in the years to come.

Comments from Central Bankers in general have demonstrated that the sale of gold from reserves is not proving a wise policy. With the trading partners of the U.S. [most of the developed and some of the underdeveloped world] concerned with the maintenance of their competitive position, the effectiveness of holding currencies other than the U.S. $ as an alternative are disappearing. Gold is therefore singularly effective as a counter to the swings in the $, so warrants an important role as a reserve asset. With the demand for gold set to continue at high levels as an investment, the previously held arguments against gold [that it yields no income] look weak, particularly when one understands the role of reserves. They are there to retain value in all seasons, particularly bad ones. Holding all reserves in income earning assets that does not provide that value in times of distress, is clearly not prudent.

It is with this in mind that Central Bankers have been discussing gold in their reserves.

Announcements to be made in early October.
At the I.M.F. conference in October, the signatories of the 2004 Central Bank Gold Agreement will announce details of their intentions regarding actual sales under the agreement.

• Italy's central bank head Antonio Fazio has confirmed that he "will say something in Washington" on Italy's position on gold. Most will expect him to announce gold sales. However, we suggest you also allow for the announcement of no, or small sales!

• France indicated earlier that it may not make any announcement until 2005 early.

• We expect an announcement from Germany in Washington.

• Indeed we would expect that the signatories, as a group will make clarifying announcements.

Perhaps the most important of these will be an extension of the Dutch Central Bank statement that, "The sale will be slotted into (the schedule). There is an annual tonnage for all countries in the gold agreement, and we talk about it together how to sell it, so there is some flexibility there, It doesn't really matter to us when we do it. We are flexible, and so are the others." The annual tonnage referred to is the 500 tonnes per annum.

From this it is evident that there will be no even regular flow of gold to the market from the Central Banks, with so much a month being sold. Each will seek a price level and sell at that retaining the flexibility to stand back until a higher price is achievable. Undoubtedly this has the power to be read as managing the gold price. But the quantities of sales involved have already been factored into the price of gold currently, so should prove insufficient to manage the gold price. So we do not accept that these sales will be engineered to keep the prices down, but will be an attempt to maximise the sales proceeds. Why? Our conclusion is that they do believe they will see higher prices in the market. On top of that, any shortfall of the planned 500 tonne ceiling, will be seen as an incentive to take the gold price higher and affirmation that gold is a sound investment. The reality of gold sales being less than the ceiling will be seen as a retention of gold by the Central Banks. Hence the sales that do take place will have to be such as to cap the spiking price.

The announcement, we have no doubt, will be intended to leave the gold market as unaffected as possible. This will be difficult unless the full 500 tonnes worth of sales, per annum is announced. Any deviation from this will push the attitude of all Central Bankers, outside the agreement, towards gold. In turn gold as an investment will be encouraged. What will also be intended in the statement is that if there is a shortfall from the ceiling of 500 tonnes of sales, the market will see the position of the "Official" sales as being used to cool any spiking of the gold price. After all a stable gold price enhances the value of gold as a reserve asset?

Subscribers to Gold - Authentic Money will be provided with our views of the expected impact on the gold price itself.

The 2004 Central Bank Gold Agreement - details: - The 2004 Central Bank Gold Agreement [set to begin on the 27th of September, as announced on the 8th of March] is as follows:

In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.

2. The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2004, just after the end of the previous agreement. Annual sales will not exceed 500 tons and total sales over this period will not exceed ,500 tons.

3. Over this period, the signatories to this agreement have agreed that the total amount of their gold leasings and the total amount of their use of gold futures and options will not exceed the amounts prevailing at the date of the signature of the previous agreement. Gold will remain an important element of global monetary reserves.

4. The gold sales already decided and to be decided by the undersigned institutions will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2004, just after the end of the previous agreement. Annual sales will not exceed 500 tons and total sales over this period will not exceed 2,500 tons.

5. Over this period, the signatories to this agreement have agreed that the total amount of their gold leasings and the total amount of their use of gold futures and options will not exceed the amounts prevailing at the date of the signature of the previous agreement.

This agreement will be reviewed after five years.

The signatories to the Agreement will be:

Please note that the Bank of England is no longer a signatory The Bank of Greece, a new Member of the " Common Market" [E.U.] is now a signatory, leaving the total at 15 signatories.

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