Just how much gold did central banks really sell?

They're less than clear, which is how they would want it as manipulators of the currency markets.

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Bundesbank Boosts Sentiment for Gold Market

By Chris Flood
Financial Times, London
Thursday, October 5, 2006

http://www.ft.com/cms/s/15eeae1a-5493-11db-901f-0000779e2340,_i_rssPage=...

Germany's Bundesbank said on Thursday that it does not plan to sell any gold from its reserves for a third year, giving a significant boost to sentiment in the gold market after recent sharp falls in prices.

This news means that European central banks are unlikely to reach the 500-tonne Central Bank Gold Agreement sales quota for a second year in succession as they re-evaluate the importance of gold's role in their foreign exchange reserves.

"We are perhaps on the threshold of an era of more moderate net official sector selling," says Philip Klapwijk, executive chairman of GFMS, the precious metals consultancy.

The Bundesbank's announcement comes at the start of the third year in the second five-year pact governing European Central Bank gold sales.

As Germany holds 3,423.5 tonnes of gold exchange reserves, it had been expected to be one of the largest sellers of bullion under the pact.

Italy, another large holder of gold reserves, as well as Ireland and Luxembourg have also not sold any gold over the last two years.

With gold prices down by more than 10 per cent since the start of September and more than 20 below their 26-year peak in May, much of the recent weakness was put down to uncertainty over how much gold central banks would sell before the end of the second year of the CBGA on September 26.

In 2004, 15 of Europe's central banks agreed to limit gold sales to 2,500 tonnes over the next five years at a maximum rate of 500 tonnes a year.

This extended the first agreement that was negotiated in 1999 to stabilise prices when gold was languishing below $300 a troy ounce and which allowed European central banks to sell 2,000 tonnes of gold between 1999 and 2004. A key point of the CBGA is that the 500 tonne sales quota cannot be rolled over from one year to the next.

At the end of August, central bank sales were about 100 tonnes short of the quota. This effectively created an overhang in the market and concerns that a last-minute rush by central banks to sell gold would drive prices sharply lower.

The expectation that central banks would rush to sell also encouraged a sharp decline last month in the number of long positions -- betting that prices would rise -- held by speculators, according to the Commodity Futures Trading Commission.

The European Central Bank on Wednesday provided an update for the market over how much gold was sold last month but this appears to have created more confusion than clarity.

The ECB's update provides a value for the sales rather than volume and this was further complicated by a revaluation of the gold sold.

Analysts trying to work out the final position have come up with differing figures, which have opposing implications for the outlook for gold prices.

GFMS says Europe's central banks sold just 393 tonnes of gold against the full quota of 500 tonnes.

"This confounds market speculation during much of September that there had been a last-minute rush to sell gold before the end of the second agreement year and that this was responsible for the period’s price weakness," said Mr Klapwijk.

However, Costanza Jacazio, of Barclays Capital, takes a different view. "We believe that central banks have reached the 500-tonnes quota due to the reporting system adopted by the ECB that shows only gold sales settled during the annual sales period and excluding forward sales not actually settled during the period."

These two contrasting views provide different implications for the outlook for prices. If central banks did indeed sell 100 tonnes of gold as suggested by Barclays Capital, that would explain much of the price weakness experienced in September.

However, if the shortfall was as large as 107 tonnes, as suggested by GFMS, then the cause for gold's recent weakness remains more fundamental, mainly a lack of interest from jewellery makers in view of the continuing volatility and high level of prices for bullion.

Barclays and GFMS agree that the outlook for gold sales by central banks is now changing.

GFMS thinks it unlikely that sales under the remainder of the agreement will reach 500 tonnes on an annual basis. Barclays also agrees that European central banks are likely to fall short of achieving the 2,500 tonne limit set for the five years to September 2009.

Gold rose 0.5 per cent to $568.85 a troy ounce on Thursday.

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