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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

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Tuesday, August 11, 2009

Is the New CBGA Bullish for the Price of Gold?

On August 7, the European Central Bank and 18 other central banks signed an extension of the 5-year Central Bank Gold Agreement (CBGA). The current CBGA caps sales at 500 tons a year and expires on September 26. The new CBGA extends the agreement for another 5 years—through 2014—with a ceiling of 400 tons per year. The following is a copy of the press release from the ECB website.

7 August 2009 - Joint Statement on Gold

European Central Bank

Nationale Bank van België/Banque Nationale de Belgique

Deutsche Bundesbank

Central Bank and Financial Services Authority of Ireland

Bank of Greece

Banco de España

Banque de France

Banca d’Italia

Central Bank of Cyprus

Banque centrale du Luxembourg

Bank Ċentrali ta’ Malta/Central Bank of Malta

De Nederlandsche Bank

Oesterreichische Nationalbank

Banco de Portugal

Banka Slovenije

Národná banka Slovenska

Suomen Pankki – Finlands Bank

Sveriges Riksbank

Swiss National Bank

In the interest of clarifying their intentions with respect to their gold holdings the undersigned institutions make the following statement:

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.
European Central Bank

Directorate Communications
Press and Information Division
Kaiserstrasse 29, D-60311 Frankfurt am Main
Tel.: +49 69 1344 7455, Fax: +49 69 1344 7404

Reproduction is permitted provided that the source is acknowledged.


Observers suggest that the agreement is positive for the price of gold because it removes the risk that central banks in Europe will sell bullion indiscriminately, flood the market, and drive the price down. However, based on recent actions, signatories to the CBGA do not seem anxious to sell their gold reserves too quickly. Actual gold sales by signatories to the CBGA in 2008 were 343 tons, well below the 500 ton per year ceiling (see chart).

According to GFMS, sales by all central banks were 39 tons for the first half of 2009, well below the 2008 pace. The largest sellers during this period were France and the ECB. Moreover, the CBGA signatory Swiss National Bank has indicated they have no plans for any further gold sales in the foreseeable future. Switzerland, with gold holdings amounting to 1,040 metric tons, is the 7th largest government holder of gold in the world.

The International Monetary Fund (IMF) is not a signatory to the agreement and intends to sell 403 tons or 12 percent of its 3,217 tons of gold to central banks. The IMF is the third largest official holder of gold in the world. Speculation is that nations with considerable U.S. dollar reserves might buy large portions of the proposed IMF sales.

The CBGA is more neutral than bullish for the price of gold given that it represents a very high ceiling on annual gold sales relative to actual sales. The new agreement, combined with the large proposed sale of gold by the IMF, results in official gold sales levels that are roughly in line with the previous CGBA. Though not bullish for bullion, the agreement does provide an unknown theoretical floor for the price of gold because of the limit on sales.

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