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Gold sales fall short of CBGA limit

The Central Bank Gold Agreement calendar ended September 26, and early estimates have gold sales under the agreement falling short of the annual 500-ton limit. However, it appears that there was a “rush for the door” in the final weeks, which I noted in the August 1 post Rumbling of more central bank gold sales was a possibility.

The rush to sell may have contributed to gold’s sharp downside moves in July and August. Since the middle of August, however, the price of gold has turned in a stellar performance. If any of the central bank sales were made since mid-August, then gold’s price action was even more impressive.

Matthew Turner, analyst for Virtual Metals, estimates central bank sales for 2007 at 475 tons; however, the World Gold Council, an authoritative source when it comes to central bank gold sales and purchases, estimated in mid-September that sales under CBGA 2007 would be 450 tons. Definitive numbers will not be available for several weeks, if not months.

Central bank sales for 2006 also fell short of the limit, and Turner estimates that in 2008 sales will again come in under the 500-ton limit, unless “. . . either Germany or Italy sells . . . or France accelerates its sales. . .” Interestingly, during the last week of the agreement, one central bank (as of yet undisclosed) reported buying gold coins, not bullion, the standard form of gold for central bank holdings.

Also interesting is that central bank gold sales under the CBGA are now falling short of the limit despite the price of gold surging to 27-year highs. Invariably, when central banks announce their reasons for selling, they mention buying “interest-bearing instruments” or “balancing their holdings.” Because the price of gold has risen to a 27-year high, the values the central banks’ gold holdings have grown disproportionate to the banks’ paper assets, so the banks sell gold and buy paper to balance their portfolios. Some sell to reduce debt, as Italy is talking about doing.

In the investment world, one thing you want to do is hold your winners and sell your losers. That’s an axiom as old as the ages. For the European central banks, however, it seems to be the opposite.

A final note: there is talk of the IMF selling up to 400 tons to pay for operations. If the IMF sells, it will undoubtedly roil the precious metals markets. However, this is a real precious metals bull market that should sop up any IMF sales if made in an announced and an orderly manner, such as sales are made under the CBGA.

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