New Central Bank Gold Agreement goes live on Sunday

But will anything really change?

Author: Rhona O'Connell
Posted: Friday , 25 Sep 2009

LONDON -

The third Central Bank Gold Agreement (CBGA3) goes live on Sunday 27th September, with the same signatories as those to the second Agreement. These countries, listed below, plus the European Central Bank, have agreed to cap their combined annual sale at 400 tonnes per annum, down from the 500 tpa limit of CBGA2 and back to the original level imposed by CBGA1 in September 1999. The statement, released early in August, reads as follows:-

•1. Gold remains an important element of global monetary reserves.

•2. The gold sales already decided and to be decided by the undersigned institutions 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. Annual sales will not exceed 400 tonnes and total sales over this period will not exceed 2,000 tonnes.

•3. The signatories recognize the intention of the IMF to sell 403 tonnes of gold and noted that such sales can be accommodated within the above ceilings.

•4. This agreement will be reviewed after five years.

The IMF is not a signatory to the Agreement, which means that the sale of up to 403.3 tonnes of IMF gold (i.e. that portion of the metal that is not subject to the second Amendment to the Articles of agreement) could still be sold in one or more off-market transactions and there has been plenty of musing in the market about the possibility that it may be sold to one or more central banks. In the long run the net effect on the market of an off-market transaction would be no different from the impact of the IMF selling its metal into the market and other official bodies absorbing it therefrom - assuming the tonnages were the same, of course (which they would not be). In the short term, though, the announcements of such a transaction would be good for market sentiment as it would once again bring into the headlines the fact that, on GFMS' calculations at least, non-CBGA signatories are net buyers of gold at present.

The point in the statement that the signatories can accommodate the sales reflects the fact that a number of countries are unlikely to take up their quota. It is arguable that had the IMF sale not been on the horizon, the CBGA quotas might well have been reduced, perhaps to 300 tonnes per annum.

Sales of gold under the second CBGA have amounted to approximately 1,887 tonnes, some 613 tonnes or 25% below the total quota. It is extremely unlikely that the sales under the new Agreement will come anywhere near the 2,000 tonne quota, even if the IMF disposal goes through the auspices of the Agreement. The new individual country quotas have not yet been published, and may well not be as only a few countries released details of their quotas under the second agreement. Sales as far as the end of July have been published by the World Gold Council and were as follows:

The largest holders among the signatories to the Agreement are Germany, France and Italy, with the IMF reporting 8,305 tonnes between them at the end of August, almost 77% of the total reserves held by ECB signatories. In other words, the other signatories to the agreement hold 2,503 tonnes between them. The Banque de France has yet to give any guidance as to its intentions under the new Agreement and Germany may remain a small seller just for coinage programmes - even though it does appear that some German politicians would dearly love to get heir hands on it for budgetary purposes - despite the fact that this is not constitutional. So far the Bundesbank has always won that particular argument.

Italy is an interesting one. The are no clear indications that the Banca d'Italia wants to sell any gold, although if the government were to win its debate about taxing the notional increase in the value of the Banca's gold reserves (which are regularly marked to market) then there is an outside possibility that some of that gold would be sold in order to generate the funds, This taxation suggestion caused quite a ripple of excitement when it was first mooted but it does look rather like a non-starter.

There is one subtle difference in the Agreement this time, which is that the restrictions on lending and the use of derivatives has been lifted. This looks like an effort to reduce red tape rather than a vital change of policy; after all the global gold mining hedge book now stands below 390 tonnes, compared with its record level of 3,064 tonnes during the year 2000, shortly after the implementation of the first CBGA, when the banks restricted their lending to the position that was outstanding at the time of the CBGA implementation (the increase in the hedge book after September 1999 can probably be ascribed that changes in the options delta as a result of shifting gold prices).

On balance then, it looks as if this new Agreement, both in terms of sales and lending, will be a case of plus ça change, plus c'est la même chose.

The signatories to the agreement are:

The ECB, and the central Banks of; Austria Belgium, Cyprus, Finland France, Germany, Greece, Ireland, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, Spain, Sweden, Switzerland