Central Bank’s Still Not Really Selling Gold

LONDON – The first month of the second year of the third Central Bank Gold agreement has brought forth no sales of gold as yet.  Figures for the IMF for October are not yet available, but at the end of September there were 74.5 tonnes of gold remaining available for disposal from the Fund’s original allocation of 403.3t of metal (i.e. the gold that was not under the auspices of the Second Amendment to the Articles of Agreement of the Fund).

Net sales of gold from CBGA signatories in the first year of CBGA3 (i.e. to 26th September 2010) came to just 6.7 tonnes, against a quota of 400tpa and the World Gold Council, in its latest “Gold Investment Digest” notes that Germany, which said in September 2009 that it would sell no more than 6.5t, actually sold only 5.2t.  What this means of course is that the other signatories sold only 1.5t (Greece and Malta).  Figures from the IFS suggest that IMF on-market sales in the period amounted to 107 tonnes. 

Although the IMF is not a signatory to the CBGA3, senior officials from both the Fund and the ECB have strongly implied that the sales can be regarded as a de facto element of the sales agreement.  So on this basis we reached effective sales of 113t during the first year of the Agreement.  If the IMF continues its disposals at the same rate as recently it will have completed its disposal by the end of calendar 2010 and GFMS Ltd expect the official sector to be a net purchaser of gold over the whole of calendar 2011.  The consultancy also points out that in the first half of 2010 the official sector was a net purchaser, to the tune of 86 tonnes, and that the sector had actually become a net purchaser in the second quarter of 2009.

GFMS estimates that countries outside the CBGA / IMF were net purchasers of 158 tonnes of gold in the first half of this year, a gain of 314% over the first half of 2009 (although this was a period of low purchases).  This change is ascribed to the increasing importance ascribed to gold as a reserve asset the decreased attraction of a number of foreign currencies given the ballooning of national debt.

Russia in particular remains on the buy side, with the latest figures showing an increase of just over nine tonnes in August, taking the country’s net purchases so far this year to 178t  (of which 131 t were in the first half of this year, thus taking up almost 83% of the net purchase in the first half of this year).  In other words the net purchases elsewhere amounted to 27 tonnes.  At end-August gold accounted for 6.2% of Russia’s gold+foreign exchange combined.

The Bank of Thailand has also shown up as a buyer, with the World Gold Council noting that the Bank bought 15.6t of gold in July.  This was an increase of 19% and takes Thailand’s gold to the equivalent of 2.6% of its gold and foreign exchange combined.  The world wide average amounted to 11.4% of total in July, the latest month for which figures are available.

Meanwhile the BIS is still taking in gold, with the latest IFS figures implying net holdings of 512 tonnes, with August holdings increasing by just over 18t – coincidentally a similar amount to that sold into the market by the IMF.  BIS holdings increased by 45t between end May and end-August.

Meanwhile the World Gold Council reports, in its latest quarterly study, that the industrial sector is continuing to recover, and is a steady source of gold demand, but that it is still suffering from the slow pace of economic recovery overall.  Early reports suggest that a normal monsoon season in India (unlike last year, which was very poor) supported robust gold sales in the first half of the third quarter of the year, but that sustained high-priced look to have constrained activity in September.  More recent indicators suggest that the markets are becoming accustomed to higher prices.

Middle Eastern demand looks to have softened in the third quarter in response to the dual effects of Ramadan falling in August and higher prices thereafter.  China and Hong Kong, however, remain vibrant.

We are approaching what is typically one of the liveliest periods for jewellery purchases.  In the very short term the market will be bolstered by Indian festival buying, with Diwali falling on 5th November.  This source of demand can be expected to be reduced thereafter, but it is potentially significant that some dealers are reporting that the physical market overall is starting to strengthen, suggesting that consumer price resistance many now be faltering and that the market is becoming used to higher prices.

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