Silver closes above $7 for first time in eight years; gold regains strength


Gold traders show muted reaction to bankers' pact

By Kevin Morrison in London
and Tony Major in Frankfurt
Financial Times
Tuesday, March 9, 2004

The gold market's muted reaction to the renewal of the
European central bank gold agreement was just the
ticket for bankers.

It marked a successful managing of expectations by
central banks. It was also a stark contrast to the first
accord in September 1999, when gold prices soared
more than $50 per troy ounce -- or about 25 percent
from 20-year lows -- as traders showed surprise that
the banks had actually agreed to form an orderly
queue to sell some of their gold holdings.

Under the new accord agreed on Monday, 15 European
central banks plan to raise the limit on annual gold sales
to 500 tonnes a year over the five years to September
2009, from 400 tonnes under the present accord, which
expires in September. The gold price has remained
within a $3 range around the $400-a-troy-ounce level
for the past two days.

The sharp price move that followed the previous agreement
had an adverse effect on central bank gold lending activities
-- the main source of income from their holdings -- as it led
to a decline in the rate banks could charge for leasing their
gold to miners who wanted to hedge. It marked the
beginning of the end for the forward gold sales boom of the
1980s and 1990s.

This activity, also known as gold hedging, gave miners
secure future revenues, but also had the effect of increasing
supply. The big rise in hedging was widely blamed for the
gold price decline to its 20-year nadir of $250 a troy ounce
in 1999.

Gold leasing rates have fallen from about 5 percent in
September 1999 to the current level of about 0.25 percent.
The fall in rates has made it less attractive for central
banks to hold vast amounts of gold.

"There is no lending business to speak of these days, and
that is because there is nobody hedging anymore," said
one official at a European central bank.

Analysts said the reduction in gold hedging in turn helped
boost gold prices, as has the dollar's decline. The dollar
gold price has risen by more than 40 per cent since September
1999, while it has increased 15 per cent over the same period
in euro terms.

The gold bullion market is now watching carefully which
central banks will sell, and how the proceeds will be spent.
Germany, Switzerland and the Netherlands have committed
about 800 tonnes between them, leaving another 1,700 tonnes
to be allocated for sale.

Ernst Welteke, Bundesbank president, is expected to hold
further talks with senior politicians in the next few days
about his plan for gold sales under the next central bank pact.

Mr Welteke has said the Bundesbank wants an option to sell
600 tonnes of gold, worth some 7 billion euros. He has
suggested using some of the proceeds to fund education and
research projects. Such a move would require a change in the
law governing the Bundesbank and is opposed by some senior
German politicians who say it is not for the central bank to
decide how the funds should be used.

Normally the central bank's profits would be transferred to the
government, which would use it to reduce public debt.

John Reade, precious metals analyst at UBS, said official gold
sales would continue as several European central banks have
large proportions of their foreign reserves invested in gold.
Germany, France, Italy, and Switzerland -- the four signatories
with the largest gold holdings -- have 43 percent, 54 percent,
46 percent and 31 percent of their total reserves in gold.

"A reduction towards the average of around 10 percent seems
inevitable," he said.


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