Commodity Online
DUBAI: Do you know the role of Central Bank Gold Agreement in the global gold prices? The CBGA has a huge role in the prices of the yellow metal.

And, this time, if you trust the World Gold Council’s advice, the central banks are not selling as much gold as it used to under the CBGA.

So, according to WGC, the central banks have sold only 91 tonnes of gold in the first six months of the fifth and final year of CBGA from the 500 tonnes permitted under the agreement. And the pact will expire in September.

Total sales in the 2007-2008 year were 358 tonnes and sales in 2006-2007 year were 475.8 tonnes.

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With France and Sweden currently the only professed sellers, the rate of sales has slowed noticeably and is likely to remain subdued for the remainder of year 5.

The CBGA was renewed in 2004 by 15 European central bankers after the pact signed in 1999 expired. The CBGA limits annual gold sales to 500 tonnes and caps total gold sales to 2,500 tonnes over five years in an attempt to moderate the flow of gold to the market.

In the first four years of the agreement, 1,727 tonnes of gold were sold. As of the end of 2008, the largest holders of gold in the world were: the United States, Germany, the International Monetary Fund, Italy, France and Switzerland.

And the key date to watch for is September 26, 2009. That’s when the current CBGA expires. The first CBGA was signed in 1999, and had a rather ambiguous goal. European central banks agreed to limit and publish their announced gold sales.

The reason was that European Central Banks own gold as a reserve asset. The signatories of the first CBGA controlled 43.6% of the world’s official gold reserves, according to the World Gold Council. The second CBGA was then signed in 2004 and limited sales to a maximum of 500 tonnes per year over five years. And with the expansion of the European Union since then, CBGA signatories now control 46.1% of world-government gold reserves.

Then you must be asking why cap official central bank gold sales? As much as they prefer their own product – paper money – central banks own gold as a crucial reserve asset in their vaults. But ten years ago, in 1999, the gold price languished at just $252 an ounce. And for the central banks, this meant the value of a major reserve asset was falling.

With the gold market then wary that further central bank gold sales could flood the market with excess supply at a time of lethargic demand, something had to be done to put a floor under the price. So to assure the market that central bank gold sales would not be used to suppress/depress the gold price, the CBGA was signed.

Since then, it’s provided transparency to planned central bank sales of gold bullion.

What will happen when the current five-year agreement expires on September 26 2009? There’s every chance a new agreement will replace it.

You should also consider the scenario if central banks abandon the agreement this year. Global central banks are also large holders of US dollars and US-denominated bonds. Gold is now accessible to retail investors in a way it wasn’t in 1999. Gold ETFs own over 1,000 tonnes of gold. This makes ETFs the sixth-largest holder of above ground gold (behind the US, Germany, the IMF, France, and Italy). Outright gold ownership amongst private investors has also leapt.

So it’s expected that central banks will prefer to hold on to their gold this year – rather like the increasing number of private individuals. As competitive currency devaluations sweep the globe in an all-out effort to fight asset deflation and recession, gold will become much more desirable as a reserve asset worth owning, not selling for cash.

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