Central Bank sales won’t knock gold price

THE gold price will not be undermined by a possible acceleration in central bank gold sales as the third year of an agreement capping central bank gold sales at 500 tons per annum draws to a close.
That’s the view of Steve Shepherd, a gold analyst at JPMorgan Precious Metals Research, who says central bank gold sales are just one variable in the broader gold price equation.
“At the moment central banks are below par in terms of the rate they need to make the 500 ton quota,” he said. “On that basis there is a risk that they will accelerate sales as they approach the end of the third year of the agreement but our view is that this won’t have a significant impact on the gold price.”

Shepherd’s comments come after the World Gold Council (WGC) released statistics showing that central bank gold sales under the Central Bank Gold Agreement 2 (CBGA2) amounted to just 294 tons as at 12 June 2007. That left scope for remaining sales of 206 tons until 26 September 2007 when the third year of the agreement comes to an end.
The CBGA2, which commenced on September 27 2004, is a pact between the European Central Bank and 14 other central banks that limits gold sales to 500 tons per year over a five-year period. Central banks are thought to control around 20% of the world’s gold supply.
Nikos Kavalis, a precious metals analyst at GFMS, said that if recent third-quarter gold sales by central banks were added to the WGC’s June figures, confirmed sales in the third year of the CBGA2 amounted to 391 tons.
“We expect underselling in the third year,” said Kavalis.
Standard Bank senior commodities analyst, Dr Walter de Wet, agreed that central bank gold sales would not dampen the gold price.
“Total global gold demand is in the order of 4,000 tons per annum so 500 tons amounts to just 12,5%,” he said. “Given that sales do not occur all at once but are spread out over a year I can’t see how it would have a major impact.”
De Wet also said that it would not be in the interests of central banks to disrupt the gold price.
“The minute central banks indicate that they want to sell gold the price of the metal would drop thereby reducing the value of their remaining reserves,” said de Wet.
Shepherd agreed, saying that the very existence of the CBGA2 indicated that Banks did not want a volatile gold market.
“It’s not in any central bank’s interest to have a disorderly gold market as it causes financial instability that hurts everyone,” said Shepherd.
David Davis, a gold analyst at Credit Suisse Standard Securities, concurred that there was little chance of central banks reaching the 500-ton quota by the end of September and that even aggressive selling would have a limited effect on the gold price.
“I don’t think they’ll reach 500-tons by the end of September,” he said. “Even if they do increase sales between now and then I doubt it would have a major impact as there’s a significant counterbalancing effect from increased de-hedging and exchange traded funds (ETFs), which both take gold out of the market.”