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Central banks revive gold bulls

Section: Daily Dispatches

By Ralph Atkins and Javier Blas
Financial Times, London
Saturday, August 8, 2009

Gold bulls were given a psychological boost yesterday as European central banks announced a lower ceiling than expected for their bullion sales over the next five years, reducing their annual quota by 20 per cent to 400 tonnes.

The lower ceiling is a fresh sign that the "anti-gold" climate that was prevalent among central banks throughout the 1990s and in the early part of the current decade seems to be fading away. Bullion prices hit a 23-year low in 1999 after the Bank of England revealed it was selling a large chunk of its gold holdings.

Although other factors, such as jewellery demand, investors' buying patterns, or mine production are more important for prices, the official sector activity usually has an important psychological impact on the bullion market.

In a joint statement, the central banks said their gold sales "will be achieved through a concerted programme of sales over a period of five years, starting on 27 September 2009, immediately after the end of the previous agreement."

They went on: "Annual sales will not exceed 400 tonnes and total sales over this period will not exceed 2,000 tonnes." The new agreement will also "accommodate" the International Monetary Fund's plan to sell 403 tonnes of gold from its reserves.

Jonathan Spall, a director at Barclays Capital's commodities desk and expert on gold, says: "All in all [it is] mildly positive for gold -- with the stress on mild."

John Reade, a precious metals strategist at UBS in London, agrees, saying the lower ceiling is a "small positive" for the market, noting the signatories of the Central Bank Gold Agreement "have not used the full ceiling for the past couple of years."

At the same time, the Swiss National Bank, one of the top 10 holders of the metal, said it had no plans to sell gold soon. The bank was a big seller earlier this decade and in the 1990s.

In London spot gold surged on news of the lower ceiling to $963 a troy ounce, near a two-month high. But later it pared gains to trade at $958. Since the Lehman Brothers collapse last September, gold prices have gone up, rising almost 13 per cent in the past 12 months. Bullion hit a record high of $1,034 an ounce in March 2008.

Investors, from hedge funds and rich individuals to pension funds and retail investors, have piled into gold, buying bullion-backed exchange-traded funds, futures, and even bullion coins and bars.

The market will pore over central bankers' speeches for any sign of selling, but most bullion traders struggle to say who will fill the 2,000 tonnes over the next five years. Setting aside 400 tonnes from the IMF, with Switzerland excluding itself, only the European Central Bank and Banque de France appear candidates for meaningful sales.

The Bundesbank has yet to follow other European central banks that have sold gold over the past decade, and analysts believe the German central bank is unlikely to dispose of its bullion holdings now.

Banca d'Italia has not sold either, but now the Italian government is pressing it to pay a special capital tax over the increase in the value of the central bank's gold holdings. Banca d'Italia opposes the measure and Jean-Claude Trichet, ECB president, this week stepped up his opposition to the tax plan.

"We have an unambiguously negative opinion," he said in Frankfurt. The ECB argues the measure would undermine the principle of central bank independence.

Without sales from Germany and Italy, most analysts and traders believe the 400-tonnes quota will not be fulfilled in any year. Indeed, the CBGA signatories have not satisfied their annual 500-tonnes current quota in the past two years.

GFMS, the London-based precious metals consultancy, estimates that central banks' gold net selling -- including banks outside the CBGA -- fell in the first half to 39 tonnes, down 73 per cent from the same period last year, and it forecasts that it will total 140 tonnes this year, the lowest since the trough of 130 tonnes in 1994.

The consultancy says the "anti-gold" climate prevalent throughout the 1990s and in the early part of the current decade seems to have ended. China shocked the bullion market this year with a significant increase in its gold reserves, from 600 tonnes in 2003 to 1,054 tonnes.

"Although the official sector remains a net seller overall, sentiment ... has shifted to one considering the metal to remain an important reserve asset," GFMS argues.

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