Latest sales under the C.B.G.A

In the week ended the 25^th August, sales of gold by one signatory of the Central Bank Gold Agreement amounted to 1 tonne of gold. 

Still no appetite for selling anywhere near the ‘ceiling’ levels, it is becoming clear to all slowly that the Central Banks are unlikely to drop large tonnages of gold onto the market at this stage of the Central Bank Gold Agreement year. We hold to our expectation that the C.B.G.A. signatories will sell only what has already been announced, that is around 300 tonnes each year for the next two years only. The balance will then be sold in the last year.

Why Germany keeps a firm grip on its gold

 We have been waiting for some sort of announcement from Herr Axel Weber, the President of the German Bundesbank. It seems as he is learning the political skill of being as clear as mud on the question of future gold sales, making the Bundesbank’s position absolutely clear on the fact that he will not sell gold for any reason connected to the political argument that gold should be sold to finance the budget deficit. But commentators could not resist the opportunity to take this out of context. He was asked to comment on gold sales with reference to assisting the government in its budget plight, a discussion that has been going on for years now. Weber has insisted as did his predecessor that the gold reserves were not to be dipped into in place of sensible and practical means to cut the budget deficit of the government. So see the statements below in the context of this discussion, not in the context of will the Bundesbank be selling gold in the next years.

What he has just said is the following:

 “The Bundesbank reserves the right to reallocate some of its gold reserves into foreign currencies but does not plan to sell any to help overhaul Germany's public finances. We've never said that we don't want to sell gold in general. It's conceivable that our reserves could be reallocated somewhat -- from gold into foreign currencies. [In the context of selling to support the deficit] But we don't want to draw on Germany's currency reserves. 

It's not a good idea to touch the substance. It would be better to consequently push for the reduction of debts. Gold is an important factor for the confidence in the stability of the €. 

He did not detail any concrete plans by Germany's central bank to restructure its gold reserves. 

In addition to the gold holdings, the Bundesbank held foreign currency reserves [which included U.S. dollars and Yen, worth around €28 billion. 

 So we have to wait, still, for a statement from Axel Weber on its intentions in terms of the Central Bank Gold Agreement option it has been given to sell up to 600 tonnes. Our expectations are that he will retain the position he has held for the last two years, not to sell. 

The basis of this belief lies in the statement he made above, “Gold is an important factor for the confidence in the stability of the €.” With such a belief, it seems contradictory to sell even some of Germany’s gold. Gold is clearly moving into the position we have expected it to for some years, of supporting currencies where they are vulnerable to a loss of confidence! 

We expect an announcement from the Bundesbank towards the end of September after the meeting of the Bundesbank then.

© 2006 Julian D. W. Phillips
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