Swiss sales dash hopes of gold recovery


By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, June 14, 2007

Switzerland's central bank is to sell a further 250 tonnes of gold, dashing hopes for a revival in depressed bullion prices after months of heavy selling by Spain and Belgium.

"This is quite significant, if you think that Britain's entire sales were 400 tonnes", said Ross Norman, director of the

"The gold price has been squashed by inexorable selling from central banks, leaving people wondering whether the bull run is over. We think the seven-year trend line is still in tact but the onus is now on the bulls to prove themselves, given the failure of gold to benefit from the inflation scare we've had," he said.

The Swiss National Bank is world's fourth biggest holder of gold after the European Central Bank system, the United States, and the IMF. Most analysts thought it had stopped selling its horde after a 1,300 tonne "purge" between 2000 and 2004,

The SNB said yesterday it would feed a fifth of its remaining gold onto the market gradually between now and September 2009 as part of a rejigging strategy for its reserves.

"As a result of the sharp rise in the price of gold, the proportion of the currency reserves held as gold has increased by about a quarter since mid-2005, from 33 percent to 42 percent. The purpose is to rebalance the composition," it said.

The Bank of Spain has been the chief seller of gold this Spring, cutting its reserves by 108 tonnes from March to May. Belgium has also been a large seller.

Total official sales of 170 tonnes over the last three months amount to the biggest collective dumping of gold on the world market since the 1999 Washington Accord, which limits central bank disposals to 500 tonnes a year.

The sales help explain the slide in gold prices of over $40 an ounce to $649 at a time when oil has seen strong, and inflation has been rising across the world. But they are ultimately a double-edged sword for gold.

As central banks feed bullion into the market, they steadily reduce the overhang of reserves that have tended to cap rallies in the past. Gold bugs insist that the emptying of central vaults prepares the way for a much stronger "blast-off" in the future.

The Spanish sales have reached a point where they beginning to set off an heated attacks from the opposition Partido Popular about the true motives behind government policy.

Finance Minister Pedro Solbes told the Spanish parliament last week that "gold is no longer profitable."

"The aim is to reinvest in bonds, which are more profitable. The Bank of Spain's fundamental goal is to maximize returns. The solvency of the financial system is not under threat," he said.

The response is unlikely to satisfy critics since data from the Bank of Spain show that all foreign reserves have been falling along with gold, including holdings of US Treasuries, Gilts, and other global bonds.

Total reserves have dropped to 13.2 billion euros (£9.02 billion), down two-thirds from 41.5 billion euroes in early 2002. France (76 billion euros), Germany (86 billion euros), Italy (59.5 billion euroes) have all kept holdings at full strength since the launch of the euro.

They clearly do no believe that membership of the euro means that each country can safely slash reserves to just 12 days import cover.

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