From Gold Forecaster - Global Watch 1st October 2006

Central Bank Gold Agreement - Sales in 2006

Total sales of the second year of the Central Bank Gold Agreement
In the final full week of the second year of the Central Bank Gold Agreement two signatories sold 12.00 tonnes of gold.

We published last week's figures in the last issue and must simply wait for the figures for Monday and Tuesday the 26th & 27th of September the last two days of the second year of the Central Bank Gold Agreement. However, there was no sudden drop in the gold price so we can be fairly sure that 100 tonne + was not sold in those two days. We have put our final figures at around the 355 tonnes. We expect the total for the year to end up at about 380 tonnes in all [this includes the transfer of 17 tonnes by France to the B.I.S. and allows the final two days gold sale of 7.3 tonnes].

The Future of the Central Bank Gold Agreement,
Many commentators tranlated the word 'ceiling' into intended sales, so the conclusions we can now draw that shape the future are:

1. The signatories have not set annual sales targets of 500 tonnes. They set limits to sales by their signatories to comfort the market, by stating categorically that they would sell no more than 500 tonnes each year. This allows the gold price to move with this figure factored into the market. The net effect of this as we have seen is to allow the gold price to rise, without the fear of potential unquantified gold sales from central Banks threatening the market, which will not come from the signatories to this agreement.

2. Nothing in the Central Bank Gold Agreement prevented the signatories from selling less than this amount. Proof of this is now established as the total for the second year at 380 tonnes is 120 tonnes less than was seen in the first year.

3. A look at the totals remaining of the announced sales for the next three years at +600 - 700 tonnes indicates we could see sales per annum drop even further to 200 tonnes for each of the remaining years of the agreement of the announced sales, for sale over the next three years.

4. Will the unnanounced sellers of Spain & Belgium continue to sell and if so, what tonnage? They have followed the route of making no announcements ahead of their sales, only after them. We strongly doubt that the will seek to take up any slack left by other signatories. If they did intend to do so, we would surely have seen them do this this year as well and not leave sales short of the 'ceiling' by 120 tonnes? Consequently, an annual total of sales from the signatories to the C.B.G.A. are more likey to be +250 tonnes per annum from now on.

5. Will Germany change its policy towards selling its gold - it was given the option of selling up to 500 tonnes under the agreement [this fits neatly into the shortfall seen this year, but would be far less than needed to mke up the 500 tonne 'ceiling' for the next three years]? The statement coming from the President of the Bundesbank, that "gold is a useful counter to the 'swings' of the $" have lost no force so far, as gold has more than doubled since the beginning of the [Washington] Europen central Bank's gold agreement. So while we do await an annual statement from the Bundesbank for confirmation of their stance, we do not expect German sale of gold beyond those needed to make a small tonnage of gold coins.

6. The signatories to the C.B.G.A. are not likely to shed any new light on their intentions either now or in the future. Behind closed doors, we have no doubt that there has been a fair number of excited conversations on the subject.

The net effect of the Agreement this year has been to indicate a waning enthusiasm for Central Bank gold sales, which in itself is very positive for investments in gold from institutions to individuals. With this expected Central Bank supply to the market dropping the demand/supply relationship.

Statements from the Russian Central Bank to the Russian Parliament [the Duma], if carried out indicate that the Russian central Bank will begin buying gold for its reserves and as we have pointed out in these columns before, by simply taking Russian gold production into its reserves, it would absorb +200 tonnes of gold annually, roughly the amount still available of the announced sale from the signatories to this agreement. This would entirely negate the impact of Central Bank Gold sales in the gold market, leaving an extremely tight demand supply relationship there a inciting greater investments in gold across the board.

Sweden to sell only 10 tonnes
The Riksbank said it intends to sell up to 10 tonnes of its gold reserves between Sept 2006 and Sept 2007, in order to obtain a better risk-adjusted return on the its assets. The proceeds from the sale will be reinvested in the foreign exchange reserves (securities denominated in foreign currency).

It said the sale is in compliance with the Central Bank Gold Agreement (CBGA) signed by 15 European central banks and running for five years from Sept 27, 2004. During that time, the Riksbank is allowed to sell up to 60 tonnes of gold. To date the Riksbank has sold 25 tonnes of gold, 15 tonnes during the first year of the agreement and 10 tonnes during the second year. The Riksbank's gold reserves currently amount to 160 tonnes of gold. This leaves 25 tonnes for sale during years three four and five.

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