European central banks to fall short of gold sales quota again


By Atul Prakash
Thursday, May 31, 2007

LONDON -- Europe's central banks are again likely to sell less gold this year than an agreed annual limit of 500 tonnes, despite a pickup in recent weeks, analysts say.

And there are mixed views on whether the banks would agree to another five-year pact after two such agreements, which began in 1999 to regulate bullion sales by the 15 signatories.

The pace has risen in the recent past due to higher sales by Spain's central bank, but total selling during the current year, which ends in September, is estimated between 380 and 420 tonnes, against 396 tonnes last year and 497 tonnes in 2004-05.

The weekly average sales have more than doubled to about 12 tonnes in the last 10 weeks from nearly five tonnes in the first 24 weeks of the third year of the Central Banks Gold Agreement (CBGA), mainly due to 80 tonnes sales by Spain in March and April. Total sales by all banks now stand at around 250 tonnes.

The Austrian central bank said on Thursday it sold 14 tonnes of gold from its reserves in 2006.

"Overall, CBGA sales are most unlikely to be maintained at this recent rate. However, we could end the agreement year a bit above 400 tonnes, rather than at or below the level," Philip Klapwijk, chairman of metals consultancy GFMS Ltd, said.

Analysts said that probably a few banks were in a hurry to sell to maintain the ratio of gold in their total reserves, but most others would go ahead with their announced plans.

Gold's share in the reserves of central banks has risen in the past years due to a sharp rise in gold prices and a drop in foreign exchange reserves at some central banks following their current account trade deficits, analysts said.

Gold surged to a 26-year high of $730 an ounce in May last year and was down at $656.15/656.65 an ounce by 0822 GMT on Thursday. The price has more than doubled in the past five years.

"At the current rate, they would not reach the allowance but would sell approximately 380 tonnes," said Suki Cooper, precious metals analyst at Barclays Capital.

There was a case for the European banks to have another pact after the end of the current agreement in 2009, but some banks might prefer an unrestricted sales environment, analysts said.

"I do think there will be another agreement, because if not, it creates uncertainty again in the market," said Stephen Briggs, economist at SG Corporate and Investment banking.

The pact was negotiated eight years ago to stabilize prices when gold was languishing below $300, partly because of frequent central bank selling. The current pact, agreed in 2004, raised the limit on gold sales over five years to 2,500 tonnes from 2,000 tonnes in the 1999-2004 period.

"I expect they will (renew the pact), as it has for them neutralized what was a controversial issue, and the market has come to expect it. However, it might be on different terms," said Matthew Turner, precious metals analyst at Virtual Metals.

Analysts said the European banks might need to have another round of selling after 2009 as the ratio of gold in their total reserves was still much higher than that of other banks despite selling more than 3,000 tonnes in the past eight years.

The 15 signatory banks now hold 12,850 tonnes of gold.

By March, Germany, the world's second-largest gold holder, had 3,423 tonnes, nearly 63 percent of its total reserves, while France held 2,710 tonnes (57 percent), Italy 2,452 tonnes (66 percent), and Spain 417 tonnes (45 percent).

That compares with 1.2 percent of gold in China's reserves, 1.8 percent in Japan, and 2.6 percent in Australia.

"There is plenty of academic research that suggests a 10-15 percent weighing in gold. I have never seen a case made for 50 percent," John Reade, head of metals strategy at UBS Investment Bank, said, referring to the ratio of gold in total reserves.

He said the banks might have found the agreement restrictive and would prefer, if possible, not to be controlled in any way.

"It would be a mistake not to have a central bank agreement in place. If there isn't an agreement, the market would be free to speculate wildly about central bank selling again."

Unlike previous occasions, gold prices have not fallen sharply despite heavy selling by central banks in the past weeks, as the market has discounted these sales, analysts said.

"The market is used to central bank sales at the levels of recent years, but it still takes a lively interest in what central banks are doing and their actions can have an effect on sentiment," said Jill Leyland, economic adviser to the World Gold Council, an industry-funded organization.

Gold prices have fallen about four percent in the past one month on a rise in the dollar and central bank gold sales.

"The market has adjusted to the increased supply from the standpoint that prices aren't tanking. The more and more they sell now without the price getting hurt too badly, the less they will be able to affect the price in future," said Neal Ryan, director of economic research at Blanchard & Co.

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