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The Central Bank Gold Agreement of 2004. - Year 2.

• Here is the table of sales from last year [below]. Some have speculated that there is a pattern, but we do not see any particular pattern, except that it appears that the principle of disclosure of intention became the disclosure of what has just happened. Indeed this covered sales from bodies that had not disclosed any intention of selling until it was subsequently disclosed. An educated guess would favour changes of opinion on the part of some sellers, which maintained the agreement's credibility. Indeed there does not appear to be a programme of sales 'set in stone'. This could, of course, be because they don't want one disclosed so as not to unduly influence the gold price. But the pattern of behaviour is not consistent with that. It appears more likely that some, like Germany, have had second thoughts on their sales.

Some have come along to sell when perhaps this decision was not made prior to the agreement being signed and some changed their mind after the event.

• The E.C.B. was a case in point. They did not announce beforehand that they would sell. We now believe they will sell 47 tonnes in each of the next four years. To say that their intention is to maintain a 15% level in gold of their reserves does not make sense as the gold price has risen persistently and should continue to do so. Does this mean that the measuring line is in Euros or in the U.S. $? Should their gold sales be linked to the value of gold against the U.S. $, a currency most appear to believe will fall? It is such a moving target that one would have to conclude that the E.C.B. was favouring the weak component of their reserves over the strong? Such a bureaucratic reasoning defies good investment sense in that gold is acting as a good counter to the weaknesses of both the € and the $? To limit these sales to 227 tonnes would also defeat the objective of a 15% level in reserves, because of the upward mobility of gold. Hence our figure below must be a guess based on the last sale.
• Germany is expected, by many, to sell up to 600 tonnes, but dropped its option to sell last year. Nothing has been heard from them since, so will they or won't they? The reason given by them was that gold was a 'good counter to the swings in the $' a feature it has demonstrated to good effect of late! So why should they change this reasoning? It is unlikely we will see any sales from them.
• France's sales tapered off, surprisingly to us, with 17 tonnes of their not being seen as part of the Agreement, it being a transaction with the B.I.S., but they did sell 115 tonnes it was reported, in all. It seems likely they will continue to sell.
  We could see sales of 100 tonnes from Spain, but no announcement to that effect has been made. Likewise Belgium is thought to be a possible seller of another 100 tonnes, but no announcement has been made on this.All in all, there is no certainty that the full amount of the 2500 tonnes will, or will not be sold. It appears this will only be certain at the end of the fifth year. The protective wall of silence and the uncertainty of the 'ceiling' being reached is as clear as mud.
  But what we do know from the above is that, as far as we know for certain, a total of 1073 tonnes remains to be sold over the next 4 years, an average of only 268.25 tonnes a year, a far cry from the 'ceiling' of 500 tonnes a year!
• However, even this amount could be sold up to the ceiling in the next two years, with no more thereafter?
• Even 500 tonnes a year appears at the moment not to be enough to cap the demand present in the market.

Portfolio Progress in South Africans

In the 13th June 2005 Issue we recommended you buy four South African Gold Mines and hold them for a year.

Here are the prices at which we recommended them and the prices today:

We believe there is much more to come as the gold price rises and the average price of gold the mines receive rises. These are not the only gold share we like, just the South African ones we recommended.

You may well ask why we recommended South African gold shares at all in view of the predatory attitude towards South African mining on the part of the South African government and its taxation policies. Primarily it is because South African miners are amongst the best in the world and they on a broad front are moving out of South Africa slowly but surely and diversifying into more lucrative and more mining friendly parts of the world. Already the cash flow from offshore is substantial. Already it is clear they will be successful outside the country and already they have made it clear they are taking the companies offshore with them. Here are the comments of the main-man-what-counts at Goldfields, Chris Thompson.

He said South African gold mining companies would have to continue their move offshore if their companies were to survive. "Unfortunately, the move to offshore business has become politicised in South Africa, even though geology has no politics," he said. "A company with its foundations in South Africa is ending. The base is gone and there's nowhere to go." South African gold mines were getting deeper and the distance between the shafts and the mining activities was also increasing. The inevitable outcome was an increase in costs, Thompson said. "The industry is dying and dropping fast."

In 1998 the South African gold mining industry produced about 450 tonnes per year. It is looking as though it will struggle to produce even 300 tonnes this year. Gold Fields would continue to expand its offshore portfolio, but as yet, there is no further clarity on whether corporate activity with Polyus, the gold unit of Norilsk Nickel, which owns about 20% of Gold Fields, would resume, but clearly there is a synergy between the two with similar objectives.

• Harmony Gold has more than 90% of its output coming from South Africa.
• DRD GOLD has less than 40% of its production in South Africa.
• AngloGold Ashanti produced 40-45% of its production in South Africa.

Some of our other recommendations in other parts of the globe and their performance will be posted in next week's issue.

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