Having concluded the sale of 150 tons of gold this year under the Central Bank Gold Agreement (CBGA), the Bank of Spain (Spain’s central bank) announced that it “plans no more significant gold sales in 2007.” Spain has been the big seller under the CBGA this year, selling 150 tons in calendar 2007 but 165 tons during the CBGA year that runs October 1, 2006 through September 30, 2007. The CBGA limits the European central bank signatories to 500 tons a year; however, with the CBGA year ending this month, it looks like only 400 tons will be sold under the CBGA this year.
The Bank of Spain has sold 239 tons since it began its sales campaign, having reduced gold holdings by 46% in volume terms. Unlike the Bank of England, which sold at the 2000 and 2001 market lows, Spain’s central bank sold into a rising market. Undoubtedly, the central bank’s sales were, at times, caused some of gold big drops in 2007. But now, the Bank of Spain says it has concluded its gold sales for 2007.
Another possible new big seller is the Bank of Italy. The Italian Parliament has discussed possible gold sales to reduce Italy’s massive public debt. However, according the Philip Klapwijik of Gold Fields Minerals Services, the sale of any Bank of Italy gold remains the central bank’s call.
GFMS expects next year’s CBGA sales to be closer to 400 tons than the 500-ton maximum. However, Klapwijik leaves himself an out with that prediction, noting that there remains the possibility that Italy will sell and maybe Germany. Further, France and Switzerland could accelerate their sales in 2008 beyond what they have announced.
If these central banks push their gold sales to the 500-ton limit, it will probably happen only if the gold market is favorable, meaning rising prices. Resourceinvestor.com has a good article on central bank gold sales.
The Fed’s rate reduction and reactions
In a move right out of a Keynesian textbook, Tuesday the Fed cut interests and the celebrations began. Stocks and precious metals registered big gains immediately on the Fed’s announcement that it had cut its target for the fed funds rate from 5.25% to 4.75%. The fed funds rate is the rate at which banks lend money overnight among themselves.
The Fed attempts to manage the rate by supplying or contracting liquidity via the buying and the selling of treasury bills and repurchase agreements in what it calls its open market operations. The Fed also cut its discount rate fifty basis points. The discount rate is the rate at which the Fed lends directly to banks.
The Dow Jones Industrials posted their biggest gains in five years, climbing roughly 336 points for a 2.5% increase. It was the biggest one-day point gain since Oct. 15, 2002, when the Dow added 378.28 points. On a percentage basis, the Dow added 2.5%, its best one-day gain since April 2, 2003, when it gained 2.67%.
Stock investors clearly saw the Fed as a White Knight charging into the financial markets. Over in the metals markets, the Fed was seen as a Black Knight, delivering freshly printed fiat currency.
Gold prices surged to a 27-year high because the Fed’s actions were clearly viewed as inflationary. However, silver prices lagged. While gold topped its high of May 2006, silver is still trading $2 below its May 2006 high. When gold and silver disconnect that much, silver becomes the better buy because it eventually catches up, sometimes rapidly, sometimes over an extended period. I expect silver to more than catch up and wholly endorse silver as the better investment at this time.
Over in the oil pits, the Fed’s move was also seen as inflationary. Oil prices closed at a record high for a second session.
Not curiously, the dollar held about 79 on the US$ Index. I think the world’s central banks were prepared. The question now is how long they will stand in the breech as private parties unload dollars.
On a further note, silver bull Ted Butler is back in the news, maintaining that the price of silver is being manipulated. If so, perhaps, that’s the reason for silver lagging gold.