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Outlook for 2008 and
2009
Why the mainstream commentators
have it wrong on central bank gold sales
by Julian D.W. Phillips, Gold
Forecaster-Global Watch
Editor's Note: Last summer, as the closing date for
this year's Central Bank Gold Agreement drew near, the financial
press was saturated with stories about massive selling (probably
from Germany and Italy) timed to come in under the wire. That
selling never materialized. In fact, when the final count was
reported recently, it turns out the central banks collectively
came in under the 500-tonne allotment at 475 tonnes. Julian
Phillips tells us below how the inner workings of central bank
gold sales might actually sort out in gold's favor for 2008 and
2009. File this special update of under "Forewarned is Forearmed!"
MK
____________
 Some prominent commentators on the gold market
are giving the impression that Germany and possibly Italy, will
eventually be sellers of their gold, although not in 2008, even
stating that the Bundesbank is 'not opposed to such sales', but
simply need to agree the purpose for which the proceeds will
be used. These commentators even say, that German gold sales
will eventually begin. We could not disagree more strongly!
 The German Bundesbank
under the governorship of Axel Weber did not agree to the purpose
for which the government intended to use the proceeds, when they
pressed the Bundesbank to sell gold, which is correct while they
made it clear that they have not made gold sales 'verboten',
as a matter of policy. But don't confuse broad policy with investment
decisions.
We believe that they are opposed to gold sales as Axel Weber
clarified when he stated, "Gold is a useful counter to
the swings of the dollar". He clearly agrees with the
fact that gold is a fine counterweight to currencies in the reserves
of a nation. More so, since he made that statement gold has performed
wonderfully whereas the $ has performed abysmally, thus confirming
the correctness of his investment policy.
The matter of what to do with the proceeds was not the issue
that divided the Bundesbank and the government, it was the independence
of the Bundesbank regarding policy decisions, a far more important
issue. What to do with the proceeds is clearly spelt out in the
rules governing the Bundesbank. They are to be retained by the
bank in their reserves. The income on those is dispersible, but
not the capital. As part of the nation's reserves they are not
there for research or social program or for any political whim,
they are reserves of the nation for a rainy day. [And that day
is getting closer by the day, too.]
Indeed, for the government to instruct the Bundesbank what to
do with the proceeds, they have first to enact a new law to do
so, which must gain the majority agreement of the Reichstag,
a seemingly unlikely possibility. This has to precede any gold
sales imposed on the Bundesbank by the government.
Meanwhile right now, the Bundesbank President can, if he so chooses
to, sell Germany's gold any time he wishes and keep the proceeds
in the bank. But he has made it clear he chooses not to, as is
confirmed by the announcement for 2008 on gold sales an investment
policy decision he has made, without being influenced by government.
We believe he will make the same announcement in 2008 covering
2009. In other words Germany will not sell its gold because it
would be a bad decision to do so -- so Bundesbank President,
Axel Weber, believes.
Italy to sell?
As to Italy being a possible seller, the Banco d'Italia used
simple uncomplicated words when last asked if they would sell.
They said, "We have no plans to sell gold".
Little there to confuse one?
Yes, the Italian Parliament did approve a plan allowing for the
sale of gold to reduce the National Debt, but as the E.C.B. stated
very strongly, it is they who make that decision not Italy. Again
the transfer of assets from the Central Bank to the government
probably would not be allowed under the existing Eurozone agreements.
Swedish gold sales now we know what lies ahead in the
next two years.
In a new announcement, Sweden said it plans to sell up to
a further 10 tonnes of gold by the end of September 2008 and
invest in foreign exchange reserves. Clearly the purpose is simply
a statement of confidence in currencies and not a wise investment
decision.
A look at the Table above (Editors note: Table not reproduced
here) shows us that this tonnage is within the amount it
originally said it would sell. With 25.6 tonnes still to sell
from that announced amount we now know that it will sell up to
10 tonnes in the year to September 208 and 15 tonnes in the final
year of the agreement, September 2009.
No more Spanish sales?
Spain was the largest seller this year with 165 tonnes, but
Spanish central bank governor Miguel Angel Fernandez Ordonez
said that the Bank of Spain plans no more significant gold sales
in 2007, which was the bulk of its planned bullion disposals.
They have 281 tonnes left in their reserves so could possibly
sell another 100 tonnes? If so the total to sell rises to 785
tonnes in the next two years.
Sales for the remaining years of the C.B.G.A.
If this can be interpreted that Spain will sell less than
this amount, possibly far less, then we can guess the total left
to sell for the balance of the two years of the Agreement at
less than 100 tonnes? If this is near the mark we can expect
the total of 785 tonnes of gold to be sold by the entire number
of the signatories to the Central Bank Gold Agreement in the
next two years. This would result in around 400 tonnes per annum,
100 tonnes less than the 'ceiling' of 500 tonnes, for each of
the two remaining years. Such a drop in the annual sales will
lace upward pressure on the gold price.
As we said last week, the beginning of the C.B.G.A. third year
[commencing on the 27th September] could see the E.C.B. sell
its annual allotment over the first one or two months, but this
should not cap the gold price at this a highpoint in the year's
demand for gold. Switzerland will sell vigorously as it has done
of late. We cannot be sure until next week if this is happening
now.
So just how could gold sales increase beyond the balance of
announced sales?
Well, the sellers who do so unannounced can add to this total
and Spain is a likely candidate [possibly up to 100 tonnes of
their 281 holdings?] but an unwise one selling to pay off debts.
Because Belgium has not sold any gold since the first year of
the agreement, we do not think Belgium will sell more.
Apart from that and in line with the intended transparency of
the Central Bank Gold Agreement, the remaining signatories will
make an announcement to sell well ahead of doing so. So we do
not exclude further announcements.
But, if these announcements don't come, and sales stay at high
levels now to reach the 500 tonne 'ceiling' this C.B.G.A. year,
they will have as little as 185 tonnes left to sell in the final
year of the agreement.
Published with permission
of the author.
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