However, if sales were at the expected low levels, then total sales over the five year period would be 500t short of maximum permitted sales of about 2,000t.
The Book said the shortfall was surprising, though the simplest explanation was the absence of German sales due to a disagreement between the Bundesbank and the Finance Ministry over what to do with the proceeds.
Countries selling gold?
However, the fact that other countries did not make use of the opportunity to sell more gold from the second year of the Agreement was a “bullish sign” for gold. The shortfall in central bank sales could be as large as 140t this year, assuming that only central banks that have sold already in the current CBGA year will sell.
“It is possible that there could be some sales from central banks that have sold gold under this agreement, but which have not sold gold in this year, but it is unlikely.”
The second CBGA kicked off in 2004, while the current fourth year of the agreement started in September 2007. Countries which have not sold any gold in the current CBGA year include Spain, Portugal, Germany, Austria and Belgium.
The Book said an apparent reluctance to sell, strongly implied that there was not a great deal of gold European Central Banks planned to sell. This had major implications for the final year of the second CBGA, starting on 27 September 2008.
In the absence of Spanish, Portuguese, Belgium or Austrian sales, total sales will only reach 200t-220t during this final year, the lowest level since the 1990s. Switzerland and the Netherlands would have completed their sales programmes by this time and known sellers France, Germany, Sweden are expected to sell 140t based on past performance, while the ECB, a “wild card” could again sell 60-80t.
The Book says four possibilities for the final year of the second CBGA exist: Sales fall up to 300t short, signaling a low desire to sell gold by central banks in that year and in future. This would be “extremely bullish” for gold.
The second possibility is that one of the other signatories, such as Germany and Italy starts selling in large volume. These countries hold nearly 6,000t between them and gold represents respectively 65% and 66% of their foreign reserves. But while the VM Group believes Italy and Germany will sell gold at some point as they were “overweight” in gold, it would not take place under the second CBGA.
The third possibility is that an existing known seller, such as France, Switzerland or the Netherlands could decide to sell more, though this would go against the spirit of the Agreement. The Swiss National Bank also said in April it had no plans to sell more gold than the 250t announced last year.
IMF selling 403t of gold?
The fourth possibility is that the IMF, which wants to sell 403t, will start to sell in the next CBGA year (2008-9). The VM Group believes IMF gold sales will get Congressional approval in the United States and would be part of the CBGA, but there is uncertainty around the timing. Notably, the Fund has insisted it would not cause “market disturbance” and it might be assumed that sales will be spread out.
“It is hard not to be bullish, especially compared with the situation just a few years ago,” said the Book.
But central bankers are as likely to be swayed by high gold prices as individual investors and gold has been the best performing reserve asset in the last few years, while remaining one of few options of diversification, and a long-term revaluation of gold’s role in a central bank portfolio has not occurred yet.
Most European central banks remain committed sellers as they hold more gold than portfolio theory suggests and the current generation of central bankers still saw gold as an “anachronism”.
“Gold sales could quickly pick up again, perhaps if the dollar was to strengthen and the gold price slipped,” said the Book. What does that mean for your gold IRA? Read more in our guide.
The VM Group said the prospects for a third CBGA starting September 2009 were very high as it would insure the market against a flood of gold if circumstances changed.