LONDON (Commodity Online): Will central banks sell or buy gold? Recently, the decision from central banks to sell Gold in the next five years made news. In its latest update on gold buying and selling by central banks, GFMS says entral banks in aggregate will continue buying gold on a net basis in the second half of 2009.

Here is an excerpt from the survey--Gold Survey 2009 - Update 1 GFMS--prepared by Philip Klapwijk, Executive Chairman, GFMS Ltd and Junlu Liang, Metals Analyst, GFMS Ltd.

In its just released Gold Survey 2009 - Update 1 GFMS suggested that the official sector in aggregate became a net buyer in the second quarter of 2009 and forecast that the second half of the year would see further net purchases. This represents a
remarkable change of direction for a market that has been used to absorbing substantial volumes of gold sold by central banks over the last decade.

The shift to the buy-side in the second quarter owed much to a sharp fall in sales from the Central Bank Gold Agreement (CBGA) signatories, as combined sales from the group over the period amounted to a mere 14 tonnes, well under the quarterly average of around 100 tonnes that had been sold up to then under the soon-to-expire second Agreement. Modest purchases by others were therefore suffi cient to swing the official sector overall onto the buy-side.

Looking ahead, as indicated above, GFMS expect central banks in aggregate will continue buying gold on a net basis in the second half. There are two main reasons for this.

First, sales from CBGA members are expected to remain at extremely low levels. The cut in the annual limit in the third Agreement from 500 to 400 tonnes reflects the fact that there is a lack of appetite to sell among major bullion holderswithin the group. Indeed, as the new Agreement approaches, none of the signatories have made official statements specifying their future sales’ plans, apart from Switzerland, which confi rmed it has no intention to sell any gold over the medium term.

Although we believe further sales from Europe under the third CBGA are probable, these could be rather more occasional than the regular sales pattern seen under the previous two Agreements.

Second, we believe there is some scope for more buy-side interest to emerge. Already in the past two years we have seen the world outside the CBGA become net purchasers of bullion, with most of the metal sourced quietly in local Gold markets. Recently, there is evidence that a growing number of official institutions are showing a greater interest in gold, mainly for portfolio diversifi cation purposes but also as an outright currency hedge.

No doubt gold’s strong performance over the past few years in contrast to (in many cases) losses on central banks’ US dollar holdings have contributed to some degree of rethinking about gold. Such developments have been given an additional stimulus by the financial turmoil experienced over the past year and increased concerns over the long-run stability of the US dollar given America’s huge fi scal deficits and the willingness of the Federal Reserve to monetize a signifi cant proportion of these.

We forecast, therefore, that the official sector will generate net demand of more than 20 tonnes in the second half, resulting in net sales for the full year of just 16 tonnes, which would be the lowest annual total in over two decades. Moreover, this could represent the beginning of an important change in trend from the one prevailing between 1989 and 2008 when central banks were major net suppliers of gold to the market, according to our data at an average annual rate of just under 400 tonnes, equivalent to a hefty 11% of total supply over the twenty year period.

Over the next year or two this new trend may be obscured somewhat by the planned sales of 403 tonnes of IMF gold, assuming, of course, that there is no off-market transfer of some or all of this bullion to an official sector buyer, something we think improbable but by no means impossible.

Once the IMF sales programme is completed, however, we would expect the official sector as a whole to have a broadly neutral impact on the market. This would represent a return to the situation prevailing in the 1970s and 1980s when the official sector was a net buyer in some years and a net seller in others.

Besides the obvious supply/demand implications for gold, such a change from net sales to something close to ‘neutrality’ would be highly positive for gold prices, as it ought to provide a major boost to sentiment and confi dence in the yellow metal.

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